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Moody's: Robust growth and prudent fiscal policy support credit profile of Germany

The Aaa rating and stable outlook of Germany reflect its very large, diversified and competitive economy, as well as its sound framework of governance and record of prudent fiscal policy, Moody's Investors Service said in a new report. A potential slowdown in external demand and rising demographic pressures are amongst the risks facing the largest economy in Europe.

The annual update, "Government of Germany -- Aaa Stable Annual Credit Analysis", is now available on Moody's subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

"Germany enjoys high levels of investor confidence and low funding costs," said Simon Griffin, a Moody's Senior Vice President -- Senior Analyst and co-author of the report. "The German economy will continue to record relatively robust and mainly domestically driven growth supported by strong employment." However, Moody's expects a slight deceleration in real GDP growth to 1.6% in 2017 against the backdrop of fewer working days than in 2016 and a less favourable non-domestic environment stemming from global and political uncertainties.

Looking ahead, the ageing population of Germany and its shrinking workforce will have negative implications for its potential economic growth and put pressure upon the sustainability of its social security system. Germany is also sensitive to external demand volatility and significant shocks that might affect exports.

Germany is also vulnerable to a potential wave of global protectionism following the election of President Trump in the United States and the vote to leave the European Union in the United Kingdom. However, Moody's regards the potential impact of Brexit upon Germany as muted in the short term, given the diversified structure of its exports. Goods exported to the UK account for around 7% of total German exports and are equivalent to around 3% of GDP.

The fiscal strength of Germany is assessed to be "Very High": Germany stands out as one of the few countries in the euro area with a debt-to-GDP ratio that has significantly declined since 2012. Moody's expects its fiscal surpluses to decrease moderately as a result of a slightly more expansionary fiscal policy, including increased social spending. Nevertheless, the ratings agency still expects the country to record surpluses of 0.4% in 2017 and 2018, 0.2% in 2019 and 0.1% in 2020.

Downward pressure upon the Aaa rating of Germany might occur if Moody's were to anticipate a material and prolonged deterioration in its economic strength, most likely associated with a secular decline in growth and wealth linked to rising demographic pressures over coming decades. A sharp increase in the government debt burden, that Moody's concluded was unlikely to be reversed, would also be negative.

Separately, a significant rise in the risk of euro area fragmentation, particularly prompted by events in core countries such as France or Italy, which suggested a sharp rise in the risk of their withdrawal from the euro area, would be negative for all euro area member countries and would exert pressure upon the rating of Germany.