German consumers in driving seat of economy as pay improves

By Michelle Martin and Ilona Wissenbach BERLIN/BOEBLINGEN (Reuters) - German consumers have taken over from exporters as the mainstay of growth in Europe's largest economy, boosted by low oil prices and interest rates, a strong job market and rising wages. Private consumption was the main engine of strong growth at the end of 2014, and it looks set to keep driving the economy, after Germany's largest labour union won a wage deal on Tuesday that will benefit 3.7 million workers. "This is by far the biggest real wage increase for many years," said Stefan Wolf, head of IG Metall union's southwest region, which secured a 3.4 percent wage increase for 15 months from April plus a one-off payment of 150 euros. The increase -- much higher than inflation, which fell at an annual rate of 0.4 percent in January -- will be a template for all 3.7 million workers represented by IG Metall. It will also set the tone for areas such as the chemical industry and the public sector. The engineering union, promoting the increase as good for Germany, saw it boosting private consumption, which grew by 0.8 percent in the last quarter of 2014, matching its best growth in three years. Gross domestic product expanded by 0.7 percent in the final quarter, the Statistics Office said on Tuesday. That brought growth for all 2014 to 1.6 percent, in a year when Germany narrowly avoided recession as the euro zone's weakness and uncertainty over conflict in Ukraine weighed on confidence. But since that mid-2014 slowdown, German consumers have taken over from exporters to provide the main impetus for growth. Wage increases should help Germany increase domestic demand and boost the flagging euro zone economy. Domestic demand contributed 0.5 percentage points to growth in the fourth quarter, ahead of foreign trade and gross capital investment -- though gross capital investment also bounced back at the end of 2014 after plunging in the middle of the year. "Persistently healthy labour market and wage developments have been joined by sharp oil price declines and also softer food prices, which is providing consumers with additional purchasing power," said IHS Global Insight's Timo Klein. "At the same time, interest rates have reached new record lows, representing even more of a disincentive to save," the economist said. CONSUMERS IN DRIVING SEAT Years of wage restraint, combined with labour market reforms, helped turn Germany -- once described as the "sick man of Europe" -- into a highly competitive economy with record-high employment. The real wage index stagnated and then shrank from 1999-2009 but has crept up again from 2010, according to the Statistics Office. It says negotiated monthly wages probably rose 3.1 percent on the year in 2014, their highest rise since 2011. Greg Fuzesi, an economist at J.P.Morgan, calculated that on an annualised basis the IG Metall deal was the biggest pay hike since 2007 and would mean negotiated pay rises for the economy overall of about 3 percent this year. With consumer morale already at its highest in more than 13 years, spending by people on lower incomes is also expected to be boosted by the introduction in January of Germany's first nationwide minimum legal wage, of 8.50 euros per hour. "People with low income tend to have a higher propensity to consume, so they save less of their additional income and consume more," said Marcel Fratzscher, head of Berlin's DIW economics institute. "So consumption will be the main driver for Germany this year for sure and possibly also next year." Fratzscher sees wages growing 2.5-3 percent this year and overall economic expansion at 1.5-1.6 percent, in line with official forecasts. But he cautioned that wages could keep growing only if productivity improves. (Additional reporting by Klaus Lauer; Writing by Stephen Brown; Editing by Larry King)