German economic growth likely to slow through export channel

The stronger state of the German economy suggests stable healthy domestic climate. Employment in the country is expanding more, growing 1.2 percent year-on-year in the second quarter, while interest rates are extremely low. This is strengthening private consumption and residential construction that is getting extra momentum from immigration.

Construction activity, which fell in the second quarter, is likely to regain momentum in coming months. In the first half of 2016, construction permits rose exceptionally high by more than 30 percent. The nation will also expand its consumption expenditure as a response to the arrival of refugee, as public budgets have sufficient scope for spending, said KfW Research in a research note.

However, the economy’s pace of growth is likely to decelerate due to the Brexit vote, particularly by the end of 2016. The service PMI saw the sharpest drop since 2009 and is quite lower than the 50 mark. This will weigh on the growth rate next year. The U.K. growth is expected to remain below half a percent, noted KfW Research. The weakness in growth in the second half of 2016 would influence growth in the year ahead due to the statistical carry-over effect.

This will impact German export growth. The U.K. market is quite an important market for German exporters. Last year, Germany shipped exports worth of EUR 89.3 billion to the U.K., accounting for 7.5 percent of the total German exports and almost 3 percent of Germany’s GDP.

Hence, growth in Germany’s exports is expected to ease in spite of gradual improvement in the developing and emerging market economies’ situation, particularly since the upswing in the remaining euro area nations is also decelerating. Also, Turkey, which is another important trading partner, is undergoing a phase of increased political uncertainty after the coup attempt. The subdued export trend would also restrict the upward potential of structurally weak corporate investment, added KfW Research.