UBS House View Daily

Thought of the day

25.08 - German growth continues

The German growth engine is firing on all cylinders. Official data released 25 August confirmed that German GDP grew at its fastest annual rate since 2014 in the second quarter, while business confidence in August remained close to all-time highs. The Institute for Economic Research (IFO) survey dipped fractionally to 115.9 from July’s record high of 116.0, as the forward-looking business expectations component rose to its highest level since January 2014.

The strength of the data might raise concerns that Germany is coming close to the end of its cycle, making it too late to buy equities. But we believe there is still room for Germany to grow and more time left in its cycle:

  • Stronger-than-expected private consumption drove 2Q GDP growth, which increased at its fastest pace since 2011. German consumers could spend more: the personal savings ratio is still 9.7% (in the US 3.8%), and well above the 2012 lows at the start of the Eurozone crisis
  • There is no sign of an aggregate lack of supply in the German economy. CPI inflation of 1.7% remains far below the previous cycle peak of 3.3% in 2007.
  • The German private sector hasn’t even begun to leverage up. The private sector credit-to-GDP ratio declined to 77.5% for FY2016, the lowest reading since 1989 and compared with 98.2% in 2009.

Overall we remain confident that the German growth engine will continue to perform strongly. We are overweight Eurozone equities.

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