Germany: Economy records its worst performance in over five years
November 23, 2018
The German economy recorded its weakest performance since the first quarter of 2013 and the first quarterly contraction since Q1 2015. In the third quarter, the economy shrank 0.2% over the previous quarter on a price-, seasonally- and calendar-adjusted basis. The print, which contrasted the robust 0.5% expansion in the second quarter, partially reflected a conflux of one-off factors. Compared to the same quarter a year ago, the economy expanded 1.1%, down from the second quarter’s 2.3% respective increase.
Domestic demand was carried by fixed investment growth, which expanded 0.8% quarter-on-quarter (Q2: +0.5% quarter-on-quarter) on the back of a quick acceleration in machinery and equipment expenditure, while construction investment remained robust. Government consumption growth, however, slowed markedly from a 0.8% expansion in the previous quarter to 0.2% in the third quarter.
More surprisingly, private consumption contracted over the previous quarter (Q3: -0.3% qoq; Q2: +0.3% qoq). This was largely due a combination of one-off factors. Inflation, for example, ticked up during the quarter and as noted by Carsten Brzeski, chief German economist at ING: “higher energy prices completely erased previous wage increases”. However, it was also reflective of structural changes in consumer preferences, particularly that Germans were more reluctant to buy new cars as highlighted by Destatis. On this point, Brzeski added that the diesel emission scandal—which began in September 2015 when the United States Environmental Protection Agency issued a notice of violation of the Clean Air Act to Volkswagen Group—coupled with “several court rulings to ban old diesel cars from cities seem to have left their mark on consumer sentiment and spending”. Cars are largely considered to be financial assets in Germany and hence, in Brzeski’s view, “some precautionary savings, anticipating imminent wealth losses should have dented private consumption”.
The headline reading was further negatively affected by the external sector, as net exports deducted 1.0 percentage points from GDP (Q2: -0.2 percentage points). This reflected a noticeable drop of 0.9% in exports (Q2: +0.8% qoq), while imports growth was resilient (Q3: +1.3% qoq; Q2: +1.5% qoq). The weakness of the external sector can also partially be explained by newly implemented regulations regarding emission norms disrupting the German automotive sector. Car manufactures did not provide the necessary paperwork in a timely fashion, which “created severe production problems in the automotive industry”, according to Brzeski. Dr. Andreas Rees, chief German economist at UniCredit, also drew the same conclusions, commenting that “export activities of German auto manufactures […] nosedived and weighed on overall exports”. Global trade tensions and emerging-markets volatility only likely further weighed on exports, cancelling out the positive effects of a weaker euro.
Looking ahead, the German economy is expected to rebound going forward and record another year of robust growth in 2019. Private consumption should receive a boost from increases to the minimum wage in January 2019 and 2020, although Brzeski suggested that “the negative [World Cup] football effect will take longer to disappear”. Nonetheless, as Rees pointed out: “In light of sound fundamentals [...] there cannot be any doubt that this is mere volatility […] To cut a long story short, a rebound in the fourth quarter is a done deal.” On the other hand, a possible escalation in trade tensions between Brussels and Washington clouds the outlook, while a full-blown trade war between the U.S. and China further darkens the horizon.
Germany GDP Forecast
FocusEconomics Consensus Forecast panelists see the economy expanding 1.7% in 2019, which is down 0.1 percentage points from last month’s forecast. For 2020, the panel forecasts GDP growth of 1.6%.
Author: Jan Lammersen, Economist