Migrantion Could Boost German GDP by 0.5% in 2016, But Will Everyone Benefit?

Unprecedented migration levels into Germany could boost economic growth in 2016 by up to 0.5% say UniCredit in their latest analysis of the German economy.

Germany is forecast to enjoy a boost to its Gross Domestic Product (GDP) in 2016 thanks to the arrival of millions of migrants.

From the outset I will qualify that the positive tone towards an expanding GDP ignores GDP per capita - i.e the share of that growth each German can expect to enjoy. Indeed, if the population growth rate outstrips economic growth then each German citizen will be worse off.

But this is rarely a popular point of focus amongst politicians and financial analysts.

“The German economy managed to grow “respectably” in 2015 as had already been the case in the previous year. When looking at the details, domestic forces unsurprisingly kept the upper hand,” says Dr. Andreas Rees
Chief German Economist at UniCredit Research.

German economic growth was confirmed at 1.5% for 2015 on Thursday the 14th of January.

Looking at the brea-down of the data a clear leader to the growth engine emerges and that is private consumer expenditures which contributed 1 percentage point to overall growth. This was the strongest contribution since 2000 (+1.2pp).

What we are looking at here is a consumption-led boost to German economic activity which confirms an increasingly entrenched pattern - that of the German economy becoming increasingly reliant on domestic spending.

“The reasons for this revival are straightforward and we already told the story many times before. Private consumer expenditures were driven by strongly rising employment, increasing wages (plus the one-off effect from the introduction of the minimum wage) and low inflation,” says Rees.

But - public consumption - i.e state spending being channeled into consumption - also grew.

“Public consumption also surged and added 0.5pp to overall growth. It was the strongest contribution since 2009, the year after Lehman when German policymakers rushed to support the economy. Of course, 2015 was different. Public consumer expenditures were primarily driven by the influx of refugees,” says Rees.

The same Germans who have made much about Greece’s public expenditure over recent years are themselves loosening the purse strings.

Migration to Fuel German Economic Growth via Demand for Public Funds

Going forward, UniCredit believe there is more to come in terms of domestic demand in 2016.

And once again, the key drivers will be private and public consumption. This does imply that Germany may be relatively immune to shocks emanating from China - “export activity and here especially China will NOT be the decisive variable in the German growth equation for 2016,” says Rees.

The influx of migrants is predicted by UniCredit to continue to add both to higher private and public consumer expenditures.

Taking the latest figures into account and including integration measures such as language courses, qualification, etc., UniCredit forecast that the combined growth impulse may amount to at least 0.5% of GDP.

This is good news if you subscribe to the dogma of limitless consumption being the most important driver to limitless growth.

UniCredit fail to discuss GDP per capita though. GDP per capita is arguably the most important economic statistic available when it comes to gauging whether the economy is actually working for its workers.

The size of the pie and the number of people sat around the table is what really counts when looking at whether Germans will enjoy a more prosperous 2016.

Construction Levels Comparable to Reunification Times

An interesting development lies with expectations for construction activity over the coming years in Germany.

The boost in demand for housing - again we can read between the lines with the refugee influx - is forecast to rocket by UniCredit.

“We think that something really big is in the pipeline as indicated both by hard and soft data. For instance, new orders in residential building was up by more than 8% (non-annualised) in September-October compared to the third quarter,” says Rees.

With a due time lag, this will translate into higher construction activity.

“Business sentiment among construction companies recently hit elevated levels which are comparable to the reunification boom at the start of the 1990s. Fasten your seat belts!” say UniCredit.

From a currency perspective how can this not be euro-positive? It certainly feeds into the theme we have been discussing here over the course of 2016 so far - the tone towards the Eurozone economy is becoming more constructive and this is feeding into a more resilient and bullish euro.