RaboResearch - Economic Research

Germany: at least, it is no recession

Economic Update

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  • The German economy grew by 0.1% q-o-q in the third quarter.
  • Domestic consumption was the main growth driver. Investments and a reduction of inventories delivered a negative growth contribution.
  • We expect a slow recovery of growth in the fourth quarter and in 2015 on the back of private consumption.

Thanks to the domestic consumers, the German economy grew by 0.1% q-o-q in the third quarter (-0.1% in the second quarter). This is close to stagnation, but it is at least is no technical recession. After the batch with negative data in August, this was widely feared. The contraction in industrial production, manufacturing orders and exports in that month was mainly caused by two temporary factors. The conflict in East-Ukraine escalated at the end of July, and German public holidays were one week later than in the previous year. However, over the full third quarter, all three data series showed a clear growth improvement compared to the quarter before.   

The breakdown of Q3 GDP-growth was in line with expectations (figure 1). Domestic consumption was the main growth driver. The growth of both private consumption (0.7% q-o-q) and public consumption (0.6% q-o-q) was strong, which provided a combined 0.5%-point contribution to growth. Also net exports contributed positively, since exports (1.7% q-o-q) grew faster than imports (1.5% q-o-q). Gross fixed capital formation delivered a negative growth contribution (-0.2%-point). Both investment in machinery and equipment (-2.3% q-o-q) and construction investment (-0.3% q-o-q), showed negative figures. Finally, a reduction in inventories deducted 0.5%-point from the GDP-growth figure.

Going forward, we expect a slow recovery of growth in the fourth quarter and in 2015, although growth will be hampered by weak investments due to many uncertainties abroad. Meanwhile, we expect private consumption to remain robust on the back of a robust labour market. In line with these expectations, we lowered our GDP-growth forecast for 2015 to 1¼% (table 1).

Figure 1: GDP growth driven by consumption and net exports
 Figure 1: GDP growth driven by consumption and net exportsSource: Destatis
Table 1: Forecast table
Table 1: Forecast tableSource: Macrobond, Rabobank

External demand remains important for the manufacturing sector

Figure 3 shows that in the current year, the manufacturing sector has been dependent on orders from abroad and mainly from non-euro area countries. The weak domestic demand for manufactured products is reflected by the levels of the producer confidence indicators that are significantly below their levels at the start of this year (figure 4). The manufacturing PMI decreased to 50.0 in November (51.4 in October), which is exactly the no-change value that signals stagnation. The PMI services dropped too (from 54.8 to 52.1). After 7 months of declines in the IFO Business Climate Index, it finally rose again in November from 103.2 to 104.7). The level is still about 6 points below the level seen in the first months of this year. All in all, the economic conditions for the German manufacturing sector worsened throughout the current year. The crisis in East-Ukraine had a (temporary) negative impact on producer sentiment.

Figure 2: manufacturing orders driven by external demand
Figure 2: manufacturing orders driven by external demandSource: Rabobank
Figure 3: Sentiment is more negative than at the start of the year
Figure 3: Sentiment is more negative than at the start of the yearSource: Macrobond, Bloomberg

Consumption growth supported by robust labour market and lower inflation

The strong private consumption growth figure has been and will be supported by the robust labour market. The unemployment rate remained at its historical low (6.7%, national definition; 5.0% ILO definition) and is expected to stay around this level. Employment is growing with 0.9% y-o-y, and the employment subject to social security contributions is increasing even faster. This implies that employees are moving from a non-standard contract (e.g. a ‘Minijob’) into a standard contract that offers more security. Moreover, the vacancy ratio (number of vacancies as a percentage of the number of unemployed) is at a record high (17.6% in November compared to a long term average of 10.8%). The increased difficulty in finding the right employee for an existing vacancy results in strong growth in monthly earnings, they increased by an average 2.8% y-o-y in the third quarter. Together with the slowing consumer price inflation (0.7% in October), this causes a strong improvement in real spending power of consumers. Therefore, we remain optimistic about private consumption growth going forward.

Figure 4: Employment growth is still strong
Figure 4: Employment growth is still strongSource: Macrobond
Figure 5: Inflation further down due to lower energy prices
Figure 5: Inflation further down due to lower energy pricesSource: Macrobond
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