Towards a shift in the balance of growth engines?

• Foreign trade makes a negative contribution to German growth
• Domestic demand continues going strong

Confirmation of the eurozone recovery in Q1 (+0.4% q/q after +0.3% in Q4 2014) is good news on more than one account. First, Spain (+0.9% q/q, the strongest growth since end-2007) and France (+0.6% q/q) were the leaders of the European pack. Second, the German recovery has slowed sharply (+0.3% after 0.7% q/q). The other good news stems from the nature of Germany’s slowdown. Once again, domestic demand (+0.5%) supported the recovery and helped limit the slowdown. Net foreign trade trimmed growth by 0.2 points due to a strong surge in imports (+1.5%), while exports rose more timidly (+0.8%). Exports should benefit fully in the months ahead from the lagging impact of the euro’s decline, whereas until recently, the price competitiveness of German goods was mainly derived from the wage moderation of the year 2000s. Companies were probably surprised by the unexpected vigour of domestic demand and reacted in part by dipping into their stocks (-0.2 points). For several months, its European partners have regularly demanded that Germany rebalance its economic model in a more cooperative manner, by giving more weight to investment and private consumption. Foreign trade will play a more marginal role in this recovery. It looks like their demands have finally been heard.