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    German Economy Accelerates in Q1 Despite Rising Political Turmoil in EU

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    Higher industrial output and a solid foreign trade surplus contributed to an acceleration of the German economy in the first quarter, offsetting fears of political turmoil in the Eurozone, stemming from the anti-EU sentiment in France and Italy.

    Kristian Rouz — As the winds of isolationist nationalism are rising in France and Italy, the Eurozone's second- and third-largest economies, Europe's powerhouse and economic leader Germany has seen growth improve this year. Driven by a solid foreign trade surplus, the economy of Germany is challenging the international competitiveness of the US, not to mention France and Italy. Despite rising political fears inside the EU ahead of the French presidential election, Germany remains the ultimate economic driver in the high-risk environment of the Eurozone's economy.

    The German Finance Ministry said on Friday that economic growth in the country is expected to have accelerated in 1Q17. The German GDP added some 1.9pc in 2016, its best result in five years, having expanded by 0.4 percent in 4Q of 2016 alone. Its increase in tax revenues early this year is interconnected with the ongoing economic acceleration. 

    "The German economy continues to be on the up," the Finance Ministry said in its monthly statement, having also said that the upbeat output data, an increase in factory orders and a consolidation in the labor market all point to an acceleration in 1Q17.  

    The ongoing Brexit process, the political concerns of a possible Frexit and Itexit, as well as the United States' agenda of economic isolationism and protectionism, however, keep the German growth outlook subdued somewhat as investors remain highly cautious.  

    In the first quarter of this year, German federal tax revenues increased by 6.8 percent annualized, far above the earlier expectations of just 2.9pc for the entire twelve months. Subsequently, this allows the federal government to increase its infrastructure investment and housing development, among other things, without adding to government debt.  

    This, however, resulted in an increase in the Deutsche Bund value, hitting the yield and natural interest rates, making it harder for the European Central Bank (ECB) to plan a normalization in monetary policies.  

    Meanwhile, in France, where anti-EU sentiment is on the rise, claims that the German trade surplus is hurting French economic interests are becoming louder. French presidential candidate Emmanuel Macron said that the entire Eurozone is disadvantaged by buoyant German exports.  

    "Germany benefits from the imbalances within the Eurozone and achieves very high trade surpluses," Macron, a fairly moderate candidate in comparison with the explicitly anti-EU Marine Le Pan, said. "Those aren't a good thing either for Germany or for the economy of the Eurozone. There should be a rebalancing."

    Now, Germany is hardly interested in a rebalancing of any sort as industrial exports are driving its growth. Even the US has repeatedly expressed the sentiment that German exports in manufactured goods are hard to compete against, and the Trump administration said that the euro is 'grossly undervalued'. 

    German Finance Minister Wolfgang Schauble, however, denied the allegations of Germany taking advantage of other nations in foreign trade, saying that strong international market demand is driving German exports rather than 'unfair' trade practices of any sort.  

    German trade practices are "normal in an open economy," the German Finance Ministry said. "They are the expression of diverse comparative advantages held by different national economies and their associated specialties." 

    The global trade disagreements and intra-EU political risks might, however, hold back the acceleration of the German economy in the near-term. Still, even if France and Italy leave the Eurozone and the EU altogether, the German current account surplus is poised to remain at its current levels or higher, mainly because the euro will have devalued even more after the Frexit and/or Itexit shocks. A resulting euro/dollar parity could actually propel German economic growth even higher, and the monetary policy tools of the Frankfurt-based ECB would allow for a more balanced and focused Eurozone.  

    Topic:
    Brexit: Article 50 Triggered (52)
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