High hopes for Germany as ‘roller coaster ride’ nears end

Frankfurt, Germany
Rainer Martini | LOOK | Getty Images
Frankfurt, Germany

A bumper week of economic data for Germany, coupled with a confirmation of its AAA rating, has boosted hopes that its recovery is gaining traction.

Germany's industrial output grew at its fastest pace in almost two years in June, according to data released on Wednesday. Output rose by 2.4 percent on the month, substantially beating the Reuters consensus forecast of a 0.3 percent gain.

This was followed on Wednesday by an affirmation of Germany's sovereign AAA rating by Fitch Ratings, who said the country's outlook remained stable.

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Wednesday's data were welcomed by economists, who said they bade well for the country's second-quarter gross domestic product (GDP) reading, which will be published on August 14.

"June's German industrial production data points to healthy quarterly GDP growth in Q2, and the sector could continue to build steam in the near-term," said Ben May, European economist at Capital Economics.

Meanwhile, Carsten Brzeski, senior economist at ING, said the country was making an "impressive comeback".

"The German economy is on a good way towards an impressive growth comeback in the second quarter," Brzeski said on Wednesday. "Slowly but surely, industrial activity has returned as an important growth driver for the German economy."

The data follow a string of positive surveys for the country. Monday's construction numbers revealed the sector was continuing to expand, and industrial orders in June posted the biggest rise since October, according to data released on Tuesday. Other releases have shown that consumer sentiment is getting a boost, unemployment is falling and the country's private sector is growing.

"It looks as if the German economy is again walking on two feet: solid private consumption and strengthening industrial activity," Brzeski said. "With this week's data, a long roller coaster ride of the German economy is coming to an end."

But Anatoli Annenko, senior European economist at Societe Generale, said that although the data hinted at strengthening momentum, it followed a first quarter which was dampened by temporary factors, such as bad weather.

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"As such, we do expect some slowdown in the third and fourth quarter," he told CNBC.

Too optimistic?

The fortunes of Europe's largest economy have long been entwined with that of the region surrounding it.

In some ways, this can be positive: Purchasing Managers' Index (PMI) data released on Monday revealed that a rebound in Germany's business activity helped euro zone business expand for the first time in 18 months in July.

But some warned that the country's heavy reliance on its euro zone counterparts – which have fared less well during the economic downturn on the whole – could prevent Germany's recovery from surging ahead.

ING's Annenko identified the uncertainty associated with the euro zone as a major downside risk to Germany's recovery.

"There's a lot of uncertainty in Europe, which is affecting German investment decisions," he said. "This could affect the economy, looking ahead."

The International Monetary Fund (IMF) on Tuesday also warned about Germany's reliance on the rest of the euro zone.

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"The outlook for the remainder of 2013 and next year is heavily dependent on a gradual recovery in the rest of the euro area and a sustained reduction in uncertainty," the IMF said. "Given its high degree of trade openness, Germany is highly susceptible to a slowdown in external demand and/or elevated financial stress. At the regional level, euro area shocks could be transmitted via trade and financial channels."

The IMF forecast that Germany's economy would grow by 0.3 percent in 2013 and 1.3 percent next year. By contrast, the German government expects the economy to grow by 1.6 percent in 2014.

Capital Economics' May said the German economy was intrinsically linked to the euro zone's prospects, and warned over getting too excited about the positive data releases.

"We doubt that Q2's pace of expansion can be sustained for too long without the rest of the euro zone staging a solid recovery, which still appears a hope too far," he said.

"Accordingly, while Germany looks set to remain the euro-zone's star performer, the consensus forecast for a rise in GDP of 1.6 percent next year is too optimistic."

By CNBC's Katrina Bishop. Follow her on Twitter @KatrinaBishop