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Europe’s German Growth Engine Kept Going in 2015

German Chancellor Merkel's Annual Press Conference Addresses The Migrant CrisisGerman Chancellor Merkel's Annual Press Conference Addresses The Migrant Crisis
State spending to support Chancellor Angela Merkel's migrant policy boosted consumption in 2015.Photograph by Thomas Imo — Photothek via Getty Images

The German economy, virtually the only one in the Eurozone to have registered consistent growth since the financial crisis, expanded by 1.5% in 2015, as strong consumption at home and booming exports to the U.S. helped it defy headwinds from Greece and other export markets.

That nearly matches last year’s 1.6% and is the sixth straight year of growth, but analysts warn that this “may be as good as it gets,” as the slowdown in the global economy hits Germany’s all-important export sector.

“High inventories, subdued order books and weaknesses in several important export markets suggest that the German export sector could soon simply face too many headwinds to prolong the recent success story,” said ING Diba analyst Carsten Brzeski.

One encouraging sign is that domestic demand took over from external trade as the main source of growth in Europe’s largest economy, suggesting that record employment levels and low interest rates are finally encouraging consumers to go out and spend more, rebalancing an economy that has been dangerously reliant on its exporters. Private consumption grew a seasonally-adjusted 1.9% in real terms, contributing two-thirds of all the growth registered.

State spending also rose, due largely to the costs of accommodating over a million migrants and refugees. But despite that, the country registered a budget surplus, for the second year in a row, of €12 billion ($13 billion), or 0.5% of GDP. The government has said it will transfer those funds to this year’s budget to cope with the demands from the migrant issue, rather than pay down debt as it originally intended.

The key question now is whether the support from low interest rates and government spending can offset falling export demand from emerging economies such as China.

Holger Schmieding, chief economist with Berenberg Bank in Berlin, said the figures implied that growth in the fourth quarter slowed to around 0.25% from an average of 0.35% in the previous three quarter, probably reflecting the slowdown in the emerging world. However, around three-quarters of Germany’s exports still go to developed countries, where policy is still generally supportive of growth, despite the Federal Reserve’s first interest rate hike in nearly 10 years last month.