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Germany Country Risk Report Q2 2016

Germany Country Risk Report Q2 2016

Core Views

Germany's growth story will remain positive in 2016 and 2017, asthe economy rebalances towards domestic demand.

A robust fiscal position means the country will cope with extra costsarising due to migrant inflows over the coming years.

Germany's current account surplus has peaked. It will graduallyshrink due to softer export growth and accelerating imports.

Support for Chancellor Angela Merkel should stabilise in 2016.

Voters who disagree with her stance on migration have likely alreadyshifted support away from her Christian Democratic Union(CDU-CSU) party.

Major Forecast Changes

We have modestly upgraded our long-term economic growth forecast,by around 0.2 percentage points (pp) a year in 2018-2025.

This reflects migrant arrivals boosting Germany's consumer baseand potential labour force once integrated into the workforce.

We have revised down our forecasts for inflation to average just1.1% in 2016 and 1.4% in 2017, amid an even bigger decline inglobal oil prices than we initially anticipated.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Economy Healthcheck: Rebalancing To Accelerate In 2016
The strengthening German economy will continue rebalancing towards domestic demand in 2016-2017, amid strong private consumption
growth and increased government spending on the migrant/refugee crisis.
TABLE: ECONOMIC DASHBOARD
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
External Trade And Investment Outlook
Shrinking Surplus A Positive Development
Germany's current account surplus has peaked. It will gradually shrink due to softer export growth and accelerating imports.
Outlook On External Position
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
TABLE: TOP FIVE IMPORT SOURCES AND GOODS IMPORTS
TABLE: TOP FIVE EXPORT DESTINATIONS AND GOODS EXPORTS
Fiscal Policy And Public Debt Outlook
Temporary Deficits No Cause For Alarm
Germany's robust fiscal position means the country will cope with extra costs arising due to migrant inflows over the coming years. It will
continue to have one of the most attractive debt profiles of any developed world country.
Structural Fiscal Position
TABLE: KEY FISCAL DATA
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
Monetary Policy
Low Inflation Net Positive For Growth
Inflation will remain weak in Germany in the years ahead. This will boost real wage growth, household disposable incomes, and
ultimately, Germany's increasingly strong consumer recovery.
Regional Monetary Policy
ECB: Underwhelming But Still Substantial Easing
The European Central Bank (ECB)'s monetary policy easing on December 3 disappointed markets in terms of its depth and breadth.
However, strengthening economic and inflation conditions in the eurozone suggest that the ECB may be better off holding fire, and in
our view, the easing is still fairly significant despite disappointment on the headline figures. We continue to forecast a weaker euro in
Chapter 2: 10-Year Forecast
The German Economy To 2025
Export Model To Lose Its Shine
Germany's economic strength is set to fade slightly 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 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
2016: A Better Year For Merkel
Having weathered an extremely challenging 2015, Chancellor Angela Merkel will cope with any potential threats to her leadership and
stem declining support for the Christian Democratic Union (CDU) over the coming quarters.
TABLE: POLITICAL OVERVIEW
Regional Politics
What Would The End Of Schengen Mean?
While the collapse of the passportless Schengen zone would mark a major step backwards for EU integration it would not necessarily
portend the end of the EU, and could in fact alleviate growing public concerns surrounding security and the impact of mass immigration.
While cross-border trade, tourism, and the establishment of 'eurodistricts' would be impeded in the short term, the continent's security
outlook would improve markedly at a period of heightened risk.
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, will be hard to address without threatening political stability, while
others, such as re-defining Germany's role in Europe, could also prove destabilising.
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 Macro Outlook
Downside Risks Gather Momentum
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: MACROECONOMIC DATA & FORECASTS

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