RaboResearch - Economic Research

Germany: mild winter dominates the figures

Economic Update


The German economy had a strong start of 2014 growing 0.8% q-o-q. The growth acceleration can partly be attributed to the soft winter that boosted construction activity. Therefore we expect a somewhat lower growth figure for the current quarter.

Well begun is half done

The growth of the GDP volume accelerated to 0.8% q-o-q in the first quarter of 2014 after an increase of 0.4% q-o-q in 2013Q4. This growth figure was somewhat stronger than generally expected. Interestingly, net exports were a drag on growth (a negative contribution of 0.9%-point compared to a positive 0.7%-point contribution in the previous quarter) (figure 1). Exports increased by only 0.2% qoq, and the value of exports to emerging Asia (i.a. China) and to European countries outside the eurozone (i.a. Russia and Ukraine) even decreased. Imports increased 2.2% q-o-q on the back of strong domestic demand. Domestic demand excluding inventory formation contributed 1.1%-point to growth. Private consumption increased by 0.7% q-o-q, government consumption by 0.4% q-o-q and business investment even by an impressing 3.2% q-o-q. Construction investment increased with 3.6%, but this can be largely attributed to the soft winter.

Going forward, we expect that the German economy will keep posting strong growth figures.  The producer sentiment indicators (figure 2) remained fairly stable at levels that are above their no-change values. Remarkable is that the PMI manufacturing slumped to 52.3 in May (compared to an average of 54.2 in the first quarter), while the PMI services increased to 56 (54.7 in Q1). Whereas the sentiment indicators point to a similar growth in Q2 as in the previous quarter, we expect a somewhat lower growth figure. According to the Bundesbank, the positive effect of the soft weather to Q1 growth has been 0.3%-point. 

Figure 1: A strong domestic driven GDP growth in Q1
Figure 1: A strong domestic driven GDP growth in Q1Source: Reuters EcoWin
Figure 2: Sentiment indicators
Figure 2: sentiment indicatorsSource: Reuters EcoWin

Outlook for domestic demand remains bright

There are good reasons to expect business investment to grow solidly going forward. The capacity utilisation rate is finally above its long-term average (figure 3).  Also the order data of the past months shows that domestic manufacturing orders increased (1.4% 3m/3m in June). Also the outlook for construction investment remains good, since the value of building permits issued rose significantly (5.8% 3m/3m). Moreover, banks reported increased demand for housing loans in the latest bank lending survey.  

Also our view for private consumption remains optimistic. The GfK consumer confidence indicator stayed at its highest level since the outbreak of the global crisis for the fourth consecutive month (8.5 in June).This optimism is supported by the relatively high nominal wage growth, which averaged 2.8% y-o-y over the last three months.  Together with the low inflation level (see below), this means that the real purchasing power of households increased. Even though the amount of unemployed increased by 24,000 persons, the unemployment rate stayed constant at 6.7% (national definition) or 5.1% (ILO-definition), which is the lowest level since the German unification.  Another sign that the labour market remains tight is the still high amount of vacancies outstanding (figure 4).

Figure 3: Capacity utilisation rate finally above its long-term average
Figure 3: Capacity utilisation rate finally above its long-term averageSource: Reuters EcoWin
Figure 4: Labour market remains strong
Figure 4: Labour market remains strongSource: Reuters EcoWin

Consumer price inflation surprised to the downside

In May, the consumer price inflation was down to 0.9% (national description, 1.3% in April) or 0.6% (HICP, 1.1% in April), according to the provisional estimation. This is the lowest level since 2010 (figure 5). The timing of Easter (2013: March; 2014: April) increased inflation in April, due to the prices of package travel, which rose inflation with an estimated 0.4%-point. Food prices are in general lower than the year before, since many harvests were better than usual, due to the soft winter weather.  Going forward, we expect the contribution of food prices to the inflation to remain muted. Moreover, due to the strong Euro, import prices will continue to have a downward pressure on the consumer price level. Therefore, we do not see a strong surge in inflation in the near future.

Figure 5: Consumer price inflation down in May
Figure 5: consumer price inflation down in MaySource: Reuters EcoWin
Table 1: Forecast table Germany
Table 1: Forecast table GermanySource: Reuters EcoWin, Rabobank

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