Focus Germany: New SPD frontrunner unlikely to defeat Merkel
Our key conclusions:
- Germany: Strong 2016 GDP growth of 1.9% supported by temporary tailwinds. 2016 GDP growth picked up further relative to the previous two years (1.9% vs. 1.7%). Growth was strongly tilted towards consumption thanks to several tailwinds (refugee crisis, low inflation, labour market strength), while slowing exports weighed on private equipment investment: With several tailwinds fading and a strong workday effect weighing, GDP growth looks set to slow to 1.1% in 2017. Recent sentiment indicators herald some upside risks for the current quarter. However, the 2.3 point drop in the expectations component of the January ifo index seems to corroborate our more cautious stance.
- The view from Berlin. Martin Schulz’s unexpected nomination likely to push the SPD’s campaign but unlikely to derail Merkel. In an unexpected turn, SPD party leader Gabriel announced that he would not run against Angela Merkel. Instead Martin Schulz, the former president of the European Parliament, will be the party’s frontrunner. Mr. Schulz’s nomination could boost the SPD’s campaign for the federal election on September 24, given his rhetorical skills and his track record as a successful campaigner in the 2014 European election. The SPD will primarily campaign for social justice, in line with Schulz’s own political views. But he will probably advocate intensified German support for the partner countries in Southern Europe, i.e. a more expansive fiscal policy stance in Germany, too. Even with Schulz, the SPD will hardly become strong enough to establish a coalition with the Greens and the Left. Mr. Schulz, who in Brussels co-operated closely with the conservative COM President Juncker, will most likely enter a renewed grand coalition if necessary, but might be less inclined to play second fiddle than current vice-chancellor Gabriel.
