Investment in Germany

Germany - Investment

Economic growth accelerates on strong domestic demand

A detailed breakdown of national accounts data saw no revisions to the growth figures previously estimated. Therefore, quarter-on-quarter economic growth remained at 0.4%, up from Q4’s flat reading, while the German economy grew 0.6% on an annual basis (Q4: +0.9 year-on-year). The detailed breakdown showed that Germany’s better-than-expected performance was largely driven by private consumption and fixed investment, while the external sector also contributed positively to growth despite a more challenging external environment.

In quarter-on-quarter terms, private consumption growth accelerated to 1.2% in Q1 from 0.3% in the prior quarter. Households benefited from still-elevated consumer sentiment and a yet tighter labor market, filling consumers’ pockets as wage growth outpaced easing inflationary pressures. Fixed investment growth, meanwhile, also shifted into a higher gear (Q1: +1.1% qoq; Q4: +0.8% qoq). A drag from inventories was offset by stronger investment growth in machinery and equipment, as well by a near doubling of growth in construction. Government expenditure, however, fell 0.3% over the prior quarter, contrasting the 1.3% expansion logged in the fourth quarter of last year.

The external sector also positively contributed to growth, as exports quickened while import growth was stable. Exports of goods and services increased 1.0% in the first quarter over the prior period, when exports rose 0.6%; imports of goods and services, meanwhile, again grew 0.7% quarter-on-quarter as in the preceding quarter. Consequently, trade contributed 0.2 percentage points to economic growth, swinging from a neutral contribution in the prior period.

Looking ahead, after countless downward revisions to growth expectations, the positive surprise is likely to undo some of those downward revisions as domestic fundamentals remain resilient. “The German economy has once again demonstrated that it should never be written off”, noted Carsten Brzeski, chief economist at ING Germany. External headwinds, however linger, especially concerning Brexit, which remains an unknown entity, and trade tensions between the United States and China, and the U.S. and EU even though threatened U.S. tariffs on European car imports have been postponed for now. In addition to the external headwinds, Brzeski mentioned that “higher oil prices could undermine the current strength of domestic demand, possibly denting consumer spending and putting additional pressure on corporate profit margins.”

Germany GDP Forecast

FocusEconomics Consensus Forecast panelists see the economy expanding 0.9% in 2019, which is unchanged from last month’s forecast. For 2020, the panel forecasts GDP growth of 1.4%.