Germany: Economy slows in Q2, external sector drives 0.4% expansion
August 24, 2016
Europe’s largest economy lost some steam but outperformed expectations in the second quarter of this year. GDP grew 0.4% quarter-on-quarter, down from Q1’s two-year high of 0.7%, which had been partly pushed up by temporary factors. The result was in line with the flash estimate but beat market expectations of a more pronounced deceleration to 0.2% growth. Trade was the main anchor of growth, while declining fixed investment constrained it.
Trends within the domestic economy were divergent, with investment performing weakly and consumption remaining robust. Fixed investment deteriorated, swinging from Q1’s 1.7% increase to a sharp 1.5% drop in Q2, marking the largest fall in over four years. A temporary decline in construction investment was partly behind this fall: construction activity was exceptionally strong in Q1 as a mild winder allowed it to be front-loaded and Q2’s drop reflects a normalization in construction. Nevertheless, investment in machinery and equipment also fell, renewing concerns that Germany is not investing enough to propel long-term growth. Conversely, household and public spending continued to support growth in Q1, though to a lesser extent than in the previous quarter. Private consumption slowed but still grew 0.2% (Q1: +0.3% quarter-on-quarter). A strong labor market, rising wages and subdued inflation have been fueling private consumption in recent quarters and continued to do so in Q2, when the unemployment rate fell to a multi-year low and consumer prices were almost stable with an average inflation rate of 0.1%. Government consumption decelerated but remained solid at a 0.6% growth rate in Q2 (Q1: +1.3% qoq).
The external sector’s net contribution to growth rose to 0.6 percentage points in Q2 (Q1: 0.2 percentage-point contribution), marking the largest contribution in over two years. This improvement mainly resulted from a deterioration in imports, which recorded the first decline since Q4 2012, falling 0.1% in Q2 (Q1: +1.3% quarter-on-quarter). Falling investment coupled with a stabilization in oil prices likely drove the drop. Exports slowed but still performed robustly, increasing 1.2% in Q2 (Q1: 1.6% qoq).
On an annual basis, GDP expanded 3.1% in Q2, marking a strong pickup over Q1’s 1.5% rise. Germany’s economy looks set to expand at a robust pace in the coming quarters mainly thanks to healthy domestic dynamics. Private consumption will likely be the backbone of the economy. Public spending will also remain solid, as rising tax revenues and low borrowing costs enable the government to increase spending while sticking to its target of achieving a balanced budget. Carsten Brzeski, Chief Economist at ING, elaborates on how household consumption and public spending will play a crucial role in supporting the expansions:
“Looking ahead, private consumption should remain an important growth driver on the back of low inflation, low interest rates, low unemployment and higher wages. In addition, at least in the short run, the refugee crisis will continue to support domestic demand (as already illustrated by strong public consumption numbers over the five quarters) and the construction sector should rebound quickly after the technical correction on the second quarter. The economy’s Achilles’ heel, however, remains the lack of new investment. To kick-start investment in an ageing economy, some government support is needed.”