Germany: Economy contracts for the first time in over three years
November 14, 2018
A flash release by the Federal Statistics Office (Destatis) on 14 November showed that the German economy shrank for the first time since Q1 2015 and at the fastest pace since the first quarter of 2013. On a seasonally-, calendar- and price-adjusted basis, the economy contracted 0.2% over the previous quarter in the third quarter, contrasting the 0.5% expansion in the April–June quarter. The result reflected a weakening external sector and softening domestic demand. On a year-on-year basis, the German economy expanded 1.1%, which was markedly down from the previous quarter’s 2.3% increase.
Domestic demand in the quarter was primarily driven by fixed investment, particularly in machinery and equipment, and construction. Meanwhile, growth in government consumption inched up. More worrisome was the decrease in private consumption despite the unemployment rate dropping to a new post-reunification low in September, higher wages and still-elevated consumer confidence. On the external front, exports growth was down in the quarter while import growth picked up. Subsequently, the external sector dragged on the economy. According to Carsten Brzeski, chief economist at ING: “The poor export performance, despite a weak euro exchange rate, suggests that trade tensions and weakness in emerging markets could continue to weigh on Germany’s growth performance.”
The economy should rebound going forward, and Germany is expected to record another year of robust growth this year and next. Domestic demand will likely remain buoyant and could receive a boost from the increases to the minimum wage in January 2019 and 2020. As summarized by Dr. Andreas Rees, chief German economist at UniCredit: “In light of sound fundamentals [...] there cannot be any doubt that is mere volatility […] To cut a long story short, a rebound in the fourth quarter is a done deal.” A possible escalation in trade tensions between the European Union and the United States, however, darkens the outlook, as does a full-blown trade war between the U.S. and China. Moreover, on the domestic front, the state elections in Bavaria and Hesse could increase tensions within the “grand coalition”.
A detailed breakdown of national accounts components will be available on 23 November.
Germany GDP Forecast
FocusEconomics Consensus Forecast panelists see the economy expanding 1.8% in 2019, which is unchanged from last month’s forecast. For 2020, the panel forecasts GDP growth of 1.6%.
Author: Jan Lammersen, Economist