Germany: Economic growth boosted by domestic and foreign demand in Q3
A detailed breakdown of national accounts data released on 22 November confirmed that the Euro area’s largest economy avoided a technical recession as it expanded 0.1% quarter-on-quarter in the third quarter. The print, which swung from a 0.2% contraction in the prior quarter, was driven by firmer domestic demand and a rebounding external sector. Compared to the same quarter a year earlier, meanwhile, the economy grew 1.0% in the third quarter, which contrasts the 0.1% drop in the second quarter.
Domestic demand firmed up in the quarter, with household consumption expanding 0.4% quarter-on-quarter (Q2: +0.1% quarter-on-quarter). A tight labor market fed through to higher wages, while inflationary pressures moderated notably on average in the quarter and consumer sentiment remained relatively elevated, despite falling slightly from the prior quarter. Carsten Brzeski, chief economist at ING Germany, noted that private consumption “remains an important anti-recession insurance for the entire economy. In fact, private consumption has been growing consecutively every quarter since the start of 2014.”
Moreover, government consumption growth also accelerated (Q3: +0.8% qoq; Q2: +0.6% qoq); continued robust public expenditure is in part due to a slightly more expansionary fiscal policy, which has included some tax reductions and increased social expenditure. On the other hand, fixed investment slightly dragged on domestic demand as it fell 0.1% quarter-on-quarter, although less severely than the 0.3% contraction recorded in the second quarter. The drop in fixed investment expenditure was mainly due to weaker public investment in machinery and equipment, while private investment expenditure increased.
The external sector, meanwhile, provided a further boost to economic growth, with net exports contributing 0.5 percentage points to the overall reading. This stands in contrast to the 0.6 percentage-point deduction recorded in the second quarter. Exports swung from a 1.3% contraction in the three months ending in June to a 1.0% expansion in the third quarter; imports, meanwhile, rose a tepid 0.1% in the third quarter, swinging from a 0.1% drop in the second.
Next year, the economy is expected to rebound on resilient domestic demand and a stronger contribution from the external sector. Nevertheless, as Brzeski underlined: “counting on only consumption and construction to offset the industrial downturn and on a possible rebound in global trade to cover the structural changes and disruptions facing several key sectors of the entire economy might be a risky gamble.” Calls for greater fiscal stimulus and a rethink on the ‘black zero’ (Germany’s constitutional debt brake) remain persistent. However, Dr. Andreas Rees, chief German economist at UniCredit, added that “in case you were still expecting a significant boost from fiscal policy, forget it. As made clear by Chancellor Merkel and Finance Minister Scholz in August, any marked stimulus would only come in case of a severe recession.”
Furthermore, Brexit uncertainty, lingering tensions between the United States and China, as well as a possible intensification of tensions between the single-currency bloc and the U.S., will continue to haunt the economy. Brzeski concluded that “in the short run […] the economy will continue to flirt with stagnation or even recession”. However, “a crash in the German economy is unlikely”, noted Dr. Rees.