RaboResearch - Economic Research

Germany: Steady as she goes

Economic Update


Once again, the German economy posted a positive growth figure in the third quarter. The increase has been entirely domestic-driven. We expect domestic demand to remain strong given the solid labour market and the positive investment outlook.

Growth entirely domestic driven

In the third quarter, the German economy grew by 0.3% q-o-q. This was lower than the 0.7% growth figure posted in Q2; though this was partly due to the catch-up effect following the unseasonably cold Winter in Q1. The breakdown indicates that the Q3 GDP increase has been exclusively driven by domestic demand as net exports contributed negatively (figure 1).

Domestically, private consumption growth disappointed after rising by just 0.1% q-o-q. Government consumption increased with 0.5%. The continuation of growth in construction investment (2.4%) and business investment (0.5%) was in line with expectations. Also inventory building contributed positively to GDP (0.2%-points). Export growth stagnated (0.1%), while import growth increased mildly (0.8%). 

Figure 1: Q3 growth is domestic driven
Figure 1: Q3 growth is domestic drivenSource: Reuters EcoWin
Table 1: Forecast table
Table 1: Forecast tableSource: Reuters EcoWin, Rabobank

Investment outlook is positive…

Soft indicators like the PMI and IFO index point towards a continuation of economic growth going forward (figure 2). For both indicators, the average of October and November was higher than the average for Q3. In November, the IFO index (109.3), PMI manufacturing (52.5) and PMI services (54.5) were all above their neutral levels (i.e. pointing to economic expansion). The combination of positive business sentiment, the capacity utilization  rate (82.3) being close to its long-term average (82.8) and the increase in manufacturing orders (1.6% 3m/3m in September) bodes well for business investment in the coming quarters.

Also the outlook for the construction sector is positive. House prices in Germany are still on the rise (in October, prices of newly built apartments rose by 7% y-o-y nationwide). Note that property prices in the big cities are rising more quickly than the national average. Given the loose financial and credit conditions and high confidence about the economic situation in general, a further rise in house prices is expected. Together with the high and still rising value of issued building permits (figure 3), a further increase in construction investment is expected.

Figure 2: Producer confidence remains strong
Figure 2: Producer confidence remains strongSoruce: Reuters EcoWin
Figure 3: Construction is on the rise
Figure 3: Construction is on the riseSource: Reuters EcoWin

…and the same holds for private consumption

Although unemployment rose in both September (24,000) and October (2,000), the labour market is still robust. As figure 4 shows, employment continues to grow steadily. What’s more, employment is primarily growing in jobs subject to social security contributions (which are the regular, full-time jobs). At the same time, atypical employment, which consists of part-time jobs with 20 or less hours per week; minor employment; fixed-term employment; and temporary employment, decreased. This indicates that the structure of the labour market is improving.  Rising unemployment together with an increase in employment can be explained by the increase in the labour force. This is due to both a pick-up of female labour participation rate and immigration, especially from Southern Europe. Against this backdrop, the labour market remains tight. Based on the recent ECB survey on small and medium enterprises (SMEs), the main problem for German SMEs is finding skilled staff and not finding customers or gaining access to external funding.

As a result of these labour market conditions, nominal wages are increasing faster than inflation (figure 5). This results in an increase in the purchasing power of German consumers, which together with the high consumer confidence (the GfK consumer climate indicator was at 7.0 in October, still close to its highest level seen in 6 years’ time) indicate that private consumption will grow next year. Also, the widely-expected introduction of a minimum wage of EUR 8.50 per hour might help boost consumption going forward. Especially in the domestically oriented services sector, many employees (e.g. hair dressers and waiters) work at wages under this level. Of course, this may result in problems for some businesses, and therefore lead to a loss of employment.

Figure 4: Employment growth
Figure 4: Employment growthSource: Reuters EcoWin
Figure 5: Purchasing power rising
Figure 5: Purchasing power risingSource: Reuters EcoWin

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