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Germany Country Risk Report Q1 2016

Germany Country Risk Report Q1 2016

Core Views

With the household consumption outlook looking increasingly positive, the long-awaited rebalancing of the German economy away from net exports and toward domestic demand is under way.

Though it is becoming more balanced, Germany's economy will continue to be characterised by very high net savings rates for both the private and public sectors, which will continue to hinder the eurozone's growth trajectory.

While we believe Germany's current account surplus will peak in 2015 on the back of lower oil prices, the narrowing of the surplus over the next five years will be limited by tight fiscal policy.

We expect German foreign policy to become increasingly isolationist over the next few years, driven by the declining global influence of the US, changing attitudes of a younger generation and fatigue with the lack of reform among eurozone states.

Major Forecast Changes

In anticipation of high expenditures to accommodate the large intake of migrants to Germany, we now expect a modest general government budget deficit of 0.1% of GDP in 2016, a downgrade from our previous projection of a 0.2% surplus.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Migrant Crisis Poses Challenges To Merkel's Authority
The ongoing migrant crisis has dented the seemingly impervious political armour of German Chancellor Angela Merkel, with her
welcoming stance criticised by the right wing of the governing Christian Democratic Union. While we expect Merkel to serve the
remainder of her third term until 2017, it has become less clear whether she will seek to - or be in a strong enough position to - serve a
fourth.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Difficult Decisions Ahead
Although it is one of the most stable countries in the world, Germany must make some difficult political choices over the next 10 years.
Some of these, such as how to deal with a rapidly ageing population, can be addressed without threatening political stability, while
others, such as redefining Germany's role in Europe, could prove more destabilising.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Twin Shocks To Provide Modest Growth Boost
Two unexpected events in H215 - the Volkswagen emissions scandal and the surging inflows of foreign migrants to Germany - are
likely to be neutral-to-positive for near-term growth, but the long-term effects are more difficult to predict. If anything, both bolster our
core outlook for rebalancing in Germany's economy towards domestic demand. Our German growth forecasts for 2015 and 2016 remain
above-consensus at 1.8% and 1.9% respectively (versus consensus estimates of 1.7% and 1.8%).
TABLE: GDP BY EXPENDITURE
Fiscal Policy And Public Debt Outlook
Migrant Crisis Will Lead To Temporary Deficit
Rising costs to accommodate migrants represent a significant unanticipated rise to German government expenditure but will be largely
offset by higher tax revenues and lower debt-servicing costs. We expect a modest general government deficit of 0.1% of GDP in 2016, a
downgrade from our previous projection of a 0.2% surplus.
Structural Fiscal Position
TABLE: KEY FISCAL DATA
External Trade And Investment Outlook
Export Engine To Cool In 2016
German exports have been resilient to the slowdown in global trade over the course of 2015. However, we see export growth slowing in
Q415 and 2016, as the Volkswagen emissions scandal takes its toll, emerging market demand remains weak, and the boost provided
by the depreciation of the euro fades.
Outlook On External Position
TABLE: CURRENT ACCOUNT
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
TABLE: TOP 5 IMPORT SOURCES AND GOODS IMPORTS
TABLE: TOP 5 EXPORT DESTINATIONS AND GOODS EXPORTS
Banking Sector Update
Direct Exposure To EM Slowdown Is Limited
With little direct exposure to vulnerable emerging markets and a strengthening domestic economy, German banks are poised to
steadily continue expanding their loan portfolios over the coming years. Indirect exposure via lending to export-oriented German-based
companies could hold the sector back, but such risks are far lower compared with the eurozone periphery crisis of 2009-2013.
TABLE: BANKING SECTOR RISK SNAPSHOT
Banking Sector Risk Components
Regional Monetary Policy
More ECB Easing To Weigh On Euro
TABLE: DRAGHI QUOTES FROM INTRODUCTORY STATEMENT AND PRESS CONFERENCE OF OCTOBER 22
Chapter 3: 10-Year Forecast
The German Economy To 2024
Economic Model To Lose Its Shine
Germany's economic strength is set to fade over the next decade as productivity gains are harder to come by and an aging population
translates into slower real GDP growth. Nevertheless, the overall picture will remain one of relative economic stability, as increased
domestic consumption replaces exports as a key driver of economic activity.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: DEVELOPED STATES - LABOUR MARKET RISK
TABLE: DEVELOPED STATES - LOGISTICS RISK
TABLE: DEVELOPED STATES - CRIME AND SECURITY RISK
TABLE: DEVELOPED STATES - TRADE AND INVESTMENT RISK
Chapter 5: BMI Global Macro Outlook
Global Outlook
Exit The Dragon
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %

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