Hence, as I expected, it is not only the export industry which drives this cyclical upswing but the domestic economy is increasingly contributing to growth. As unemployment is dropping and real wage growth should pick up, the longer-term outlook for domestic consumption remains bright. I think there are two more important factors which will cause the domestic economy to do increasingly well:During the first decade of the Euro, Germany has suffered from a tight monetary environment (weak credit growth and much too high real yields). This depressed domestic investment by the corporate sector and led the savings ratio higher (an increase in the savings ratio was also a rational response to increased economic insecurity amid the high number of reforms in social security and labour markets earlier last decade). Now, the monetary environment is becoming increasingly accommodative (historically very low nominal yields coupled with above-trend inflation means that real yields are extremely low; additionally given the strong economy credit availability is improving). In combination with the healthy economy and a high level of competitiveness, the corporate sector should increase its domestic investments. Additionally, given higher job security (amid the low level of unemployment), the savings ratio of private households should drop markedly. Finally, weak consumption by German households during the past decade suggests that there should be a lot of pent-up demand, especially for durable goods and housing.
The chart below shows the development of 10y German real yields (defined as 10y nominal Bund yields minus German yoy headline inflation). As can be seen, the monetary environment has become significantly easier over the past two years given that first nominal bond yields have become much lower and inflation has recently moved higher again. Furthermore, current German real yields are the lowest since the start of the Euro!
10y German real yields (10y nominal Bund yield - German inflation rate) at record lows
Source: Bloomberg; Research Ahead
Immigration trends are shifting. Earlier this week the German statistics office published the latest immigration data for 2010. It showed that on a net basis some 128.000 people have moved into Germany. This is a significant shift from earlier years and marks the highest net immigration since 2003. It is down to both, more foreigners moving to Germany and less German residents moving abroad. I am convinced that immigration will increase further. A key factor for immigration are relative economic prospects. Given that the German economy is doing so well and hence creates a lot of jobs whereas a host of other European countries are doing poorly with high unemployment rates, suggest that the attractiveness of Germany has increased significantly. Significant positive migration would positively affect trend growth (as it provides more labour to the economy and increases private sector demand) and help to ease the demographic problems Germany is facing in its social security system.