RaboResearch - Economic Research

Germany: Europe’s growth engine faltered

Economic Update

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In the second quarter, the German economy shrank by 0.2% q-o-q. Without the negative impact of the warm winter, GDP growth would probably have been positive. Hard data also shows that the German economy had a strong start of the current quarter. 

The warm winter had a negative effect on the Q2 growth figure

Economic growth in Germany disappointed in the second quarter, the GDP volume decreased by 0.2% q-o-q after a 0.7% q-o-q increase in Q1 (figure 1). The negative growth figure can mainly be attributed to the unusually mild winter weather, that gave a strong impulse to construction investment in Q1 (+4.1% q-o-q). In the second quarter, this frontloading caused a sharp decline in the gross fixed capital formation in construction (-4.2% q-o-q), which subtracted 0.4%-point from growth. Besides this, also business investment turned out to be weaker than expected (-0.4% q-o-q). Also net exports did not support GDP growth, since imports (+1.6% q-o-q) grew faster than exports (+0.9% q-o-q) in Q2. Positive contributions to the GDP figure were made by both inventory formation (0.4%-point) and private consumption (0.1%-point).

Summarized, the figures for the second quarter were weaker than expected, with weaknesses in both domestic and foreign demand. Without the impact of the soft winter, GDP growth would probably have been positive, but still weak (around 0.2% q-o-q).

Figure 1: GDP growth breakdown
 Figure 1: GDP growth breakdownSource: Macrobond
Table 1: Forecast table Germany
Table 1: Forecast table GermanySource: Reuters EcoWin, Rabobank

Soft and hard data tell different stories

The German industry had a good start of the current quarter. The industrial production (excluding construction) rose by 1.9% m-o-m in July. However, the momentum is still negative (-0.6% 3m/3m), which indicates that the strong July data is merely a bounce back from the weak previous months. The same holds for the more forward looking factory orders data, which increased strongly in July (+1.7% m-o-m), while the 3-months moving average is still negative (-0.9% 3m/3m). The recovery of factory orders can be mainly credited to a strong surge in orders from non-euro area countries (+9.8% m-o-m) (figure 2), which is also partly a bounce back from the weak second quarter. Also the trade data for July shows a surge in demand from countries outside the European Union. Compared to July 2013, the export value rose by 4.7% y-o-y and the import value decreased by -1.8% y-o-y (both data are seasonally adjusted). The trade surplus over July was at its highest level ever(23.4 bn euro, which equals about 10%-GDP).

Sentiment indicators give a much bleaker image of the German economy. The PMI manufacturing fell to 51.4 in August (from 51.8 in July). It is an 11-month low, but still above the no-change value (50). The PMI services deteriorated slightly to 56.4 in August (56.7 in July). The IFO-indicator fell to 106.3 from 108.0 in the previous month. The consensus forecast was 107, so this outcome was a negative surprise. Whereas one could argue that it is still above its long-term average (102.7 since Jan-2000), it has been overstating the economic recovery since mid-2013 (figure 3). Finally, also the EC European Sentiment Indicator (ESI) deteriorated significantly to 104.1 in August (from 106 in July). So far, the unrest in East-Ukraine, seems to have affected the producer confidence more strongly than the hard data. It should be noted that the latest sanctions against Russia have just been introduced at the end of July, and that therefore the hard data does not yet include this development.

Figure 2: Pickup in foreign orders bodes well for exports in Q3
Figure 2: Pickup in foreign orders bodes well for exports in Q3Source: Macrobond
Figure 3: During the last year, the IFO indicator overstated economic growth
Figure 3: During the last year, the IFO indicator overstated economic growthSource: Macrobond

Real purchasing power of consumers is improving further

The labour market stays robust, the unemployment rate remained at a historical low (6.7% national definition, 5.0% ILO-definition). Moreover, the amount of vacancies is increasing steadily. As a consequence of the tight labour market, the nominal wage growth is high, it increased by 3.4% y-o-y on a 3-month rolling basis. Together with the still low amount of inflation, it averaged at 0.9% during the same three months, the real purchasing power of German households improved considerably. Given this increase in spending power, it is remarkable that consumption growth has been so meagre in the second quarter. Together with the still high level of the GfK consumer confidence indicator (8.6 for September), we expect private consumption growth to become stronger going forward.

The increase in both private sector employment and earnings resulted in higher government revenues from taxes in the first half of 2014 (+3.0% y-o-y). As a result, general government revenues rose by 3.4% in the first half of 2014 compared to 2013H1. Since expenditures increased less (2.5% y-o-y) than revenues, the surplus of the general government budget increased to 16.1 bn Euro in 14H1, which equals 1.1%-GDP.

Figure 4: Nominal earning increase much faster than inflation
Figure 4: Nominal earning increase much faster than inflationSource: Reuters EcoWin
Figure 5: German government realized a significant budget surplus
Figure 5: German government realized a significant budget surplusSource: Macrobond, Destatis
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