Germany: Fixed investment and inventory build-up support economic growth in Q1
A detailed breakdown of national accounts for the first quarter confirmed the return to growth, with GDP expanding 0.2% quarter on quarter on a seasonally- and calendar-adjusted basis (Q4 2021: -0.3% qoq). This matched the preliminary reading. On an annual basis, the economy expanded 4.0% year on year, up from the previously reported 3.7% increase (Q4 2021: +1.8% yoy). That said, the German economy was still 0.9% below its pre-pandemic level.
The quarterly rebound was driven by firming capital outlays and inventory build-up. Fixed investment expanded 2.7% over the prior quarter (Q4: 0.0% qoq) on the back of a jump in construction-sector investment and greater expenditure on machinery and equipment. Changes in inventories contributed 1.2 percentage points to economic growth in the period, up from 0.2 percentage points in the fourth quarter last year. On the other hand, household spending dropped 0.1% quarter on quarter, which marked the second consecutive quarterly contraction (Q4 2021: -1.3% qoq). Household spending was unable to reap the benefits of the economic reopening, likely due to elevated energy prices amid the war in Ukraine. Government consumption, meanwhile, grew 0.1% quarter on quarter (Q4 2021: +0.2% qoq).
The external sector was a significant drag on the headline reading. Exports of goods and services fell 2.1% over the prior quarter after expanding 3.8% in the fourth quarter last year. Continued international supply chain problems have weighed notably on the exports of goods. Growth in imports of goods and services eased to 0.9% in the quarter, from 4.1% in the prior period. All in all, the external sector subtracted 1.4 percentage points from growth, after contributing 0.1 percentage points in the fourth quarter of last year.
Turing to the second quarter, the fading impact of the pandemic should provide some respite to the economy. Moreover, leading data for the period paints a fairly positive picture. However, a notable build-up of inventories in Q1 bodes poorly for the industrial sector as manufacturers will likely offload stockpiles to meet demand amid protracted supply issues. In addition, elevated inflation coupled with weakened consumer sentiment could take the edge off private consumption in the second quarter.
Carsten Brzeski, global head of macro at ING, is more bearish than the Consensus:
“The predictive power of leading indicators has come under pressure as much as the predictive power of traditional macro models. Maybe it’s just an economist’s reflex to discredit indicators that don’t match their own scenarios but the discrepancy between leading indicators and hard macro data is currently significant. […] We stick to our base case scenario of a mild contraction in the German economy in the second quarter.”