This will probably be the most upbeat note you will read on Germany this month.
Our view of a
return to trend GDP growth in the euro area is certainly not consensus. Far easier to only focus on the
weakness of the German manufacturing PMI (44.1) than highlight the acceleration seen in wages (which no
one believes anyway) or do any fundamental analysis of the detailed flow of funds and National Account
data for the fourth quarter.
The fact of the matter is that German household disposable
incomes grew by 3.8% in the year to Q4 2018 (5.2% annualised on the quarter). There have been individual
quarters when German household disposable income growth was slightly stronger, but one effectively needs
to go back to the bursting of the tech bubble in Q4 2001 to see a similar period of sustained strength in
household incomes. To put this in context the German manufacturing PMI was the weakest reading since only
2001 was also a year when, expressed a share of disposable incomes, outstanding
household debt in Germany was higher than that of the UK and US (strange but true) and followed 2000, a
year when non-financial corporations in Germany were running a deficit of 6.2% of GDP. If the German
housing market was rolling over we would be more concerned, but this is not what the data tells us, nor
what we could see on the ground in Frankfurt last week. Another bias when many commentators talk about
the German economy is to only see it through the prism of manufacturing and downplay the importance of
the much larger service sector, which is now outperforming again.
The flip-side of the
strength of household incomes has been a squeeze on profit margins of German non-financial corporations.
Q4 2018 can be seen as something of an outlier, but if the German economy starts to pick-up momentum
again, underpinned by a buoyant service sector and, in a world of zero interest rates, a further
acceleration in lending, then the direction of travel for profit margins is clear (up).
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