RaboResearch - Economic Research

Germany: Still going strong

Economic Update


Second quarter economic growth in Germany was broad-based. Given the current readings of both the producer and consumer confidence, the economy is expected to continue growing in the coming quarters.

GDP-growth figure partly caused by a temporary, weather-related, factor

Germany’s GDP increased by 0.7% q-o-q in the second quarter of 2013 . This rise followed stagnation in Q1. The expenditure breakdown reveals that growth was broad based (figure 1). On the domestic front, the rise in consumption by both households and the government contributed positively to growth. The end of an unseasonably cold winter resulted in a ‘catch-up’ effect in the construction sector. Part of the increase in construction activity is, however, caused by additional housing demand. We expect this trend to continue going forward amid the pick up in the issuance of residential construction permits.

The recent hard data releases show that the German economy made a slow start to the third quarter. Both industrial production excluding construction (-2.3% m-o-m) and orders of the manufacturing industry (-2.7% m-o-m) experienced a setback in July. The latter was partly because of the unwinding of the huge increase in June orders (+5.0%). Note that the underlying trend in manufacturing orders is still positive (+1.3% on a 3m/3m basis).

The soft data paint a rosier picture of the economy. Producer confidence indicators remain high and are still rising. The IFO-index (figure 2) rose to 107.5 in August (from 106.2 in July) and therefore points towards a continuation of economic growth in the third quarter.  Also other sentiment indicators, like the manufacturing PMI (51.8) and the European Sentiment Indicator (103.8) are above the neutral threshold and so send encouraging signals. 

Figure 1: Contributions to demand components of GDP-growth
Figure 1: Contributions to demand components of GDP-growthSource: Destatis
Figure 2: Growth expected to persist
Figure 2: Growth expected to persist Source: Reuters Ecowin

Consumers remain upbeat

The GfK consumer climate indicator of September, calculated on the basis of August survey results, slipped slightly to 6.9 from 7 in the previous month (figure 3). Still, the index is close to the highest level seen in 6 years’ time. The breakdown reveals that consumers have rather modest expectations about the economic outlook (1.8). The indicator for income expectations declined for the first time in five months, but is still at a high level (37.2). Despite this decline, the ‘willingness to buy’ sub-component is high (44.4) and is still rising. Given the low level of interest rates and the recent increase in inflation (see below), consumers seems to be confident that it is currently a good moment to make major purchases.

One of the reasons why consumers remain optimistic is the strength of the labour market (figure 4). The unemployment rate in August remained at 6.8% for the fourth month in a row. Since September 2011, the rate has been in the 6.7%-6.9% range. The number of unemployed persons increased by 7000 persons in August, after a decrease by the same amount in July. Also employment growth is stable at 0.1% q-o-q growth in the second quarter, following a 0.2% q-o-q rise in Q1. Given the positive outlook for the German economy for the second half of the year and 2014, employment is expected to increase further. 

Figure 3: GfK consumer confidence is high
Figure 3: GfK consumer confidence is highSource: Reuters EcoWin
Figure 4: German labour market remains strong
Figure 4: German labour market remains strongSource: Reuters EcoWin

Increase in inflation is reversed

During August, German consumer prices remained flat month-on-month, and therefore the annual inflation fell from 1.9% to 1.5% owing to favourable base-effects (figure 5). The previous months’ higher inflation rates were due to high food prices. The rising oil prices will, however, likely lead to higher energy prices in September. Given the soft recovery of the German economy, no major pick-up in consumer prices is expected for the rest of the year.

Figure 5: Inflation breakdown
Figure 5: Inflation breakdownSource: Reuters EcoWin
Table 1: German economy at a glance
Table 1: German economy at a glanceBron: Source: Reuters EcoWin, Rabobank

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