Germany: Economy avoids technical recession in the third quarter
November 14, 2019
Germany defied market expectations and avoided a technical recession in the third quarter, likely thanks to robust private consumption and exports. In the three months ending in September, the German economy grew 0.1% quarter-on-quarter on a seasonally- and calendar-adjusted basis, swinging from a revised 0.2% contraction in the second quarter (previously reported: -0.1% quarter-on-quarter).
Although a detailed breakdown of national accounts will not be released until the end of November, preliminary data released by the Federal Statistical Office on 14 November suggests that the quarterly expansion came on the back of public and private consumption. Households benefited from a still-tight labor market in the quarter and markedly weaker inflationary pressures from the prior quarter, while low interest rates should have further lent a hand to private consumption. Fixed investment, however, likely capped the expansion in domestic demand, as the fall in investment expenditure on machinery and equipment seems to have negated the rise in spending related to construction investment. On the external front, exports expanded while import growth should have remained stable; as such, the external sector is expected to have supported economic growth in the quarter.
The latest result, however, does not mean that the German economy is out of the woods just yet. Moreover, fourth quarter data hints at the continuation of a two-speed economy. Data points to a protracted recession in the industrial sector, with the manufacturing PMI remaining deeply entrenched in contraction through October. Exacerbating matters, lingering external headwinds do not suggest a quick turnaround is on the cards. On the other hand, a still-tight labor market, muted inflationary pressures and renewed monetary policy dovishness should continue boosting domestic demand.
Looking ahead to next year, FocusEconomics Consensus Forecast panelists expect the German economy to rebound slightly from this year’s weak performance, although economic growth is likely to remain lackluster nonetheless. Carsten Brzeski, chief economist at ING Germany, commented that “it looks as if either the cyclical factors weighing on German industry will dissipate somewhat, with the entire economy rebounding, or the domestic part of the economy will also slow down.” Brzeski concluded by stating that: “After 10 years of almost unstoppable economic growth, a shorter period of stagnation is not necessarily a big crisis. This also explains the resistance or at least hesitation of the German government to engage in significant short-term fiscal stimulus.”
Author: Jan Lammersen, Economist