Germany: Economic slowdown confirmed in Q3

The economic slowdown in the third quarter was confirmed in Europe’s largest economy. GDP grew 0.2% quarter-on-quarter, down from Q2’s already slow 0.4% and the lowest result since Q1 2015. The result was in line with both the flash estimate and market expectations. The slowdown was driven by a deteriorating external sector, which could only partially be compensated for by still strong domestic demand. On an annual basis, GDP expanded 1.5% in Q3, marking a precipitous drop from Q2’s 3.1% pickup.

The components that had driven the deceleration in Q2 were the main sources of growth in Q3. Fixed investment was flat in Q3 after a steep contraction in the previous quarter, thanks to stronger housing investment. At the same time, private consumption grew 0.4%, twice as fast as in Q2, supported by continued strong wage growth, public pension increases and the prospect of future tax cuts. Private consumption was able to compensate for slower government consumption, which inched down from 1.2% growth in Q2 to 1.0% in Q3, and pushed total consumption up from last quarter.

The external sector’s net contribution to growth fell dramatically to minus 0.3 percentage points in Q3, contrasting Q2’s 0.6 percentage-point contribution. This deterioration mainly resulted from a contraction in exports, which decreased 0.4% in Q3 following Q2’s healthy 1.2% growth. The fall is a likely result of the increased uncertainty following June’s Brexit vote. Imports grew at a stronger pace, registering a 0.2% uptick (Q2: +0.1% quarter-on-quarter).

Against this backdrop, Germany’s growth prospects are fairly stable but lackluster. The government expects economic activity to increase 1.8% in 2016 and 1.4% in 2017. FocusEconomics Consensus Forecast panelists have similar expectations to the government and foresee economic activity expanding at a broadly steady pace of 1.8% in 2016, which is unchanged from last month’s forecast. For 2017, the panel forecasts GDP growth of 1.4%, which was also unchanged from last month’s estimate.