Investment in Germany

Germany - Investment

Economy grows at quicker rate than previously estimated in Q4, despite lockdown

The Euro area’s largest economy grew at a quicker pace than previously estimated in the fourth quarter of last year, with GDP expanding 0.3% quarter-on-quarter (previously reported: +0.1% qoq), despite the reintroduction of lockdown measures to halt the spread of the second wave of the coronavirus. This followed the historic 8.5% quarterly expansion logged in the third quarter as activity recovered from the first lockdown in spring. As such, the economy avoided a double-dip recession more comfortably than originally estimated. However, the economy was still down 2.7% over the same period a year prior (previously reported: -2.9% yoy).

A detailed breakdown of the quarterly result highlighted that growth was driven by external demand, with exports of goods and services expanding 4.5% qoq (Q3: +18.0% qoq). Imports of goods and services also continued to grow (Q4: +3.7% qoq; Q3: +9.0% qoq), albeit at a softer pace, and net exports contributed 0.6 percentage points to the headline reading as a result.

On the domestic front, demand suffered from renewed restrictions, which hit the services sector particularly hard. Household spending swung from a 10.8% increase in the third quarter to a 3.3% decrease in the fourth: Tighter social distancing measures were announced in early November, which limited the number of people allowed inside stores. This was followed by the closure of shops in December, after November’s restrictions failed to bring cases down. Meanwhile, public consumption dropped 0.5% in Q4 (Q3: +0.6% qoq), but fixed investment rose 1.0% (Q3: +3.9% qoq). The latter chiefly benefited from activity in the construction sector, as investment in machinery and equipment was largely unchanged.

Last year, the German economy suffered its first annual contraction since the global financial crisis due to the pandemic and related containment measures. Turning to this year, the economy is forecast to return to growth although it will continue to feel the effect of lockdown measures in the opening quarter, with the federal government recently extending some restrictive measures until 7 March. However, the rollout of vaccination programs and the subsequent removal of restrictions globally will strengthen domestic and foreign demand, leading to a bounce-back in activity later in the year. That said, the balance of risks remains tilted to the downside amid lingering uncertainty over potential new strains of the virus, and the speed and efficacy of the vaccine rollout. Moreover, questions remain over the strength of the global economic recovery.

Commenting on the outlook for the first quarter, Carsten Brzeski, global head of macro at ING, added:

“The stricter lockdown measures since mid-December, the harsh winter weather in February, a reversal of any pre-Brexit hoarding in the UK and weaker foreign demand at least from other eurozone countries have increased the risk of an unwelcome rotation. The growth drivers of the fourth quarter could easily become drags in the first.”

Taking a bird’s eye view, Katharina Utermöhl, CFA, senior economist at Allianz, stated:

“Over the course of the year, the German economy will move at a rapid pace through the entire economic cycle palette, from short-term economic gloom in Q1 to a vaccine-driven consumption boom in the second half of the year.”

Last year, the German economy suffered its first annual contraction since the global financial crisis due to the pandemic and related containment measures. Turning to this year, the economy is forecast to return to growth although it will continue to feel the effect of lockdown measures in the opening quarter, with the federal government recently extending some restrictive measures until 7 March. However, the rollout of vaccination programs and the subsequent removal of restrictions globally will strengthen domestic and foreign demand, leading to a bounce-back in activity later in the year. That said, the balance of risks remains tilted to the downside amid lingering uncertainty over potential new strains of the virus, and the speed and efficacy of the vaccine rollout. Moreover, questions remain over the strength of the global economic recovery.

Commenting on the outlook for the first quarter, Carsten Brzeski, global head of macro at ING, added:

“The stricter lockdown measures since mid-December, the harsh winter weather in February, a reversal of any pre-Brexit hoarding in the UK and weaker foreign demand at least from other eurozone countries have increased the risk of an unwelcome rotation. The growth drivers of the fourth quarter could easily become drags in the first.”

Taking a bird’s eye view, Katharina Utermöhl, CFA, senior economist at Allianz, stated:

“Over the course of the year, the German economy will move at a rapid pace through the entire economic cycle palette, from short-term economic gloom in Q1 to a vaccine-driven consumption boom in the second half of the year.”

FocusEconomics Consensus Forecast panelists see the economy expanding 3.8% in 2021, which is down 0.1 percentage points from last month’s forecast. For 2022, the panel forecasts GDP growth of 3.6%.