Germany continues a policy of fiscal consolidation amidst declining business confidence, according to economic data released on Tuesday, February 23rd.
The biggest economy in the Eurozone enjoys record low unemployment, a surging budget surplus, but decelerating growth and a declining business confidence.
Record government surplus
Germany’s government budget surplus was the biggest in absolute and relative terms since its reunification, according to the national statistical service. Germany ran up a €21 bn in 2015, or 0,6% of the GDP; this follows an €8.9 bn surplus in 2014 (or 0.3% of the GDP at the time).
The surplus more than doubled, without taking into account the one-off revenue from a mobile broadband frequency auction worth €5,1 bn; €3,8 bn of that one-off payment will be recorded in 2017.
The surplus was achieved by fiscal consolidation, that is, federal government spending cuts worth €10.3 bn. State governments also contributed to fiscal consolidation by €0,4 bn, against a €0,6 bn last year.
Germany has adopted a “golden rule” both at a government and state level in 2009. That rule states that the Government can borrow only to invest and not to fund current spending. Right now, Germany has a negative cost of borrowing and the highest possible rating from all credit-rating agencies. However, the government continues to consolidate.
Sliding business confidence
Over the last quarter of 2015, German GDP growth surged by 0,3% and an annualized 1,7%. As the German economy is stepping on break, business confidence continues to decline for a third month, according to the Ifo prestigious business confidence indicator released on Tuesday.
Meagre domestic growth over the fourth was pushed by domestic consumption and is partially owed to mass immigration, while the rate of exports was decelerating.
The Ifo Business Climate Index for German industry and trade fell to 105.7 points on February, compared to 107.3 points in January. The majority of companies were pessimistic about their business outlook for the first time in over six months. The climate was especially negative in manufacturing, but also wholesale and retail.
The only sector looking optimistic was construction, boosted by new demand from generated by the influx of migrants and record-low interest rates. Unemployment in Germany remains a multi-year low 4,5%.
Reasons for failing confidence
Germany is an export-oriented economy and managers’ pessimism stems from a variety of sources, including low oil prices and renewed concerns about China’s economic slowdown.
(DE, Ifo, AFP, Reuters)