Germany: German economy expands at fast pace in Q1 on the back of fixed investment and private consumption
May 24, 2016
The German economy picked up pace in the first quarter of this year and economic growth outpaced that of most other Euro area countries. GDP recorded the largest expansion in two years, with quarterly growth speeding up from Q4’s seasonally-adjusted 0.3% to a notable 0.7% in Q1. The result was in line with the flash estimate and market expectations. Q1’s result confirms that domestic demand is still the backbone of the economy. While exports have traditionally been Germany’s main motor of growth, since 2013 the domestic economy has surpassed the external sectors as the lead contributor to GDP growth.
The upturn in Europe’s largest economy was driven by strong fixed investment growth and steady private consumption. Fixed investment recorded the largest expansion in two years, rising 1.8% (Q4: +1.4% quarter-on-quarter). The result was underpinned by booming construction activity due to mild winter weather. Private consumption grew at a steady pace of 0.4% in Q1, buttressed by the renewed drop in oil prices at the beginning of the year, record-low unemployment, rising incomes and the ECB’s monetary stimulus. While public spending continued to expand robustly in Q1, it increased at a slower pace of 0.5% (Q4: +0.9% qoq).
The external sector continued to restrain growth, as a rebound in exports was insufficient to offset rising imports. On a positive note, the external sector’s drag on growth decreased. Exports swung from a 0.6% contraction in Q4 to a modest 1.0% expansion in Q1. The rebound was sustained by resilient exports to EU countries and increasing exports to China. Imports rose 1.4% in Q1 (Q4: +0.5% qoq). As a result, the external sector’s contribution to growth advanced from minus 0.5 percentage points in Q4 to minus 0.1 percentage points in Q1.
On an annual basis, GDP expanded 1.3% in Q1, marking a deceleration over Q4’s 2.1% rise. The economy is likely to expand at a robust pace in the coming quarters. However, quarterly growth will likely fall short of Q1’s strong result, partly due to the fact that construction activity was front-loaded in Q1, and also because several positive one-offs will likely fade in Q2.
Commenting on Q1’s reading, Jörg Hinze, Senior Economist at the Hamburg Institute of International Economics (HWWI), added:
“The German economy in Q1 achieved a surprising high increase of GDP. Thereby the well growing domestic activity however have been overdrawn by special factors, namely a mild winter, which pushed the building activity more than seasonally normal, and high expenditures because of providing refugees. These factors will not continue in Q2, and therefore the growth rate of GDP will be considerably lower again. But further on the growth process of domestic activity will continue with a moderate rate. All over the year 2016 GDP will increase with a rate of 1 ½ %.”