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On a Roll

May 16, 2008

The German economy surged in the first quarter of this year, defying a global slowdown. DW's Karl Zawadzky remains optimistic about Germany's ability of maintaining its current financial boom.


Experts are predicting that economic growth will slip this year. They cite the financial crisis, high oil and gas prices and the expensive euro.

But the German economy is currently quite robust -- perhaps even more robust than many experts think. The surprisingly strong jump in economic activity during the first quarter is evidence of this. While gross domestic product increased by only 0.3 percent in October, November and December, it rose by 1.5 percent in the first three months of 2008.

That is an amazing increase that however shouldn't lead to hasty conclusions. A closer look reveals the reasons for the unexpected growth, as well as the markers that will influence further developments.

Domestic markets get attention

Karl Zawadzky
Karl ZawadzkyImage: DW

For years, business activity has been fuelled by ever increasing export records. But now, focus has shifted to domestic markets. There were few impulses from abroad that spurred the German economy during the first quarter. The rising prices of key imports crude oil and gas, but also the expensive euro, which put the breaks on German exports, played a decisive role.

While the trade surplus dropped dramatically, domestic investment rose. This can be attributed to the fact that many companies are expanding their production capacity.

Tax write-off restrictions at the end of 2007 and the low snowfall during the winter are additional, perhaps even more crucial reasons behind the shift.

Many investment deals were not officially closed by the end of the year and had to be carried over into 2008, which muddled the statistics.

The mild weather meant that construction projects weren't interrupted. Compared to the first quarter of last year, the number of construction projects rose dramatically. The unusually mild winter thus effectively oversubscribed the economic growth statistics, which means that a drop in the second quarter can only be expected.

Little reason for pessimism

But the German economy is still on track for growth. Even in the first quarter, personal consumption rose after many weak years. Employment was up 1.8 percent compared to spring 2007 and the rise in wages in some sectors promises the biggest increase in buying power in years. That will boost consumption. The German economy is powering ahead, propelled by its own strength.

The indicators suggest that the German government is on the safe side with its growth prediction of 1.7 percent. Some economic experts are already speaking of 2 percent or more.

The good news is that inflation will drop. It already sank from 3.1 percent in March to 2.4 percent in April.

Compared to other countries in the EU, Germany is proving to be the bloc's economic engine and is powering through the current financial crisis quite well. While the German economy grew by 1.5 percent in the first quarter, the EU reported an average growth rate of only 0.7 percent.

However, the recession in EU partner countries represents yet another danger to Germany's export-dependent economy.

Karl Zawadzky is DW-RADIO's business editor. (kjb)