The path of Germany's domestic demand
The growth seen by the German economy over the last few years is not very different from what it experienced in the years prior to the crisis. However, the components on which this growth is supported have changed considerably, with domestic demand and exports seeming to have swapped roles. Between 2000 and 2007, domestic demand's contribution to growth was only 0.6 p.p. while this has risen to 1.2 p.p. in the last three years. Can we expect this greater impetus by domestic demand to consolidate?
On isolating the different components of domestic demand, we can see that private consumption has played a key role to this increased growth. While private consumption only grew at an annual rate of 0.6% from 2000 to 2007, during 2011-2013 it increased by 1.3%. We therefore need to understand whether this upswing in consumption is well grounded and particularly whether it can last or even increase over the coming years.
Greater growth in the disposable income of households is fundamental to sustain the rise in consumption and both the trend in the unemployment rate as well as the trend in wages has been highly favourable over the last few years. On the one hand, the unemployment rate (averaging 10.2% during 2000-2007) fell to 6.8% in 2013. We can also see that the average growth in hourly wages in 2011-2013 was greater than the rise occurring in the years prior to the recession. Although it is true that part of this reduction in the unemployment rate has been due to an increase in part-time employment, this has not stopped the gross disposable income of households from maintaining a notable growth rate. Between 2011 and 2013 its average annual growth was 2.8% compared with 2.1% in 2000-2007. Given that unemployment is already at an all-time low, part-time employment is likely to fall over the next few years and the growth rate for wages will continue, factors that will help to consolidate growth in household income and therefore consumption.
Another two elements that should be borne in mind are the trend in the household savings rate and the household level of debt. Both will also help consumption to play a more important role in the coming years. Germany's savings rate, which has historically remained at a higher level than its European neighbours, currently stands at 16.2% of gross disposable income compared with 15.0% in France, 10.5% in Spain and 5.0% in the USA. Over the last few years, however, a slight downward trend has started that could intensify if the good economic prospects consolidate and real interest rates remain low. The debt level of German households should not act as a brake on consumption either. This stands at 58% of GDP, lower than the average level for the euro area, namely 65%, and than Spain or the USA, which in both cases is close to 80%.
In summary, all the evidence suggests that the dynamism of German household consumption in particular, and domestic demand in general, may provide a definitive boost over the coming years, helping to put the euro area's recovery firmly on track and reinforcing the leading role played by the German economy over the last few years. All the elements for this to happen are already in place.
