Economy returns to growth, records fastest expansion in a year in Q1

A second reading confirmed that the German economy rebounded in Q1 2024, increasing 0.2% on a seasonally adjusted quarter-on-quarter basis. The upturn came above the 0.5% contraction seen in the fourth quarter of last year and beat market expectations. Q1's reading marked the best result in a year. On an annual basis, economic activity dropped 0.9% in Q1 (Q4 2023: -0.4% yoy), the largest decrease since Q1 2021.

Domestically, Germany’s quarterly upturn chiefly reflected a rebound in fixed investment, which grew 1.2% in Q1, contrasting the 2.1% contraction logged in the prior quarter. Accelerating investment in the construction sector underpinned the overall recovery. That said, private consumption fell 0.4% in the first quarter (Q4 2023: +0.4% s.a. qoq), weighed on by still-elevated inflation and deeply pessimistic consumer sentiment. Moreover, government spending swung to a 0.4% contraction (Q4 2023: +0.6% s.a. qoq), the sharpest drop since Q1 2023. On the external front, exports of goods and services increased 1.1% on a seasonally adjusted quarterly basis in the first quarter, buoyed by stronger goods exports and contrasting the fourth quarter's 0.9% contraction. In addition, imports of goods and services bounced back, growing 0.6% in Q1 (Q4 2023: -1.6% s.a. qoq), marking the best reading since Q3 2022.

Our Consensus is for the economy to avoid contraction by a whisker in Q2 and for GDP growth to pick up in subsequent quarters. Over 2024 as a whole, our panelists expect the economy to rebound from 2023’s downturn—the worst in 14 years, barring 2020’s pandemic-induced decline—but to post only a shallow expansion. Germany will once again be G7’s worst performer and will fall short of the Euro area average. Rebounds in private and public spending will only partly offset a sharper drop in fixed investment amid still-tight financial conditions. Meanwhile, persistent weakness in external demand will weigh on exports.

EIU analysts weighed in: “We continue to expect a gradual and modest economic recovery in 2024, amid ongoing cyclical and structural headwinds. [However], economic activity on the whole will remain weak throughout 2024.” Analysts at Goldman Sachs commented on Germany’s structural challenges: “First, the economy is highly exposed to trade with China with dependence on imports of intermediate goods. Second, the auto industry continues to play an outsized role, which is under pressure from the shift to electric vehicles. Third, Germany has one of the lowest net public investment rates amongst major advanced economies and it has fallen behind on key infrastructure metrics like digitalisation. Fourth, Germany faces a pronounced demographic challenge, with a notable decline in the working-age population in coming years. Fifth, the economy suffers from excess regulations relative to other advanced economies.”

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