RaboResearch - Economic Research

Germany: Will the fourth quarter of 2018 bring bad news as well?

Economic Comment

  • German economy is gradually losing momentum
  • Car sales are recovering, but damage of Q3 is not repaired yet
  • Declining IFO indices also point at lower growth, but not a recession


The German economy is gradually losing momentum. In the third quarter the economy actually shrank by 0.2%. The most important cause was the car industry. Car production and sales more or less collapsed in Q3, due to problem that the industry had in meeting new emission standards. It was widely expected that Q4 would see a strong revival here. Therefore, last week’s news that German car sales in November were more than 7% lower than a year earlier felt like a cold shower. Rightly so? A closer look at the data tells a slightly different story.

Recovering car sales, albeit slower than hoped for

Figure 1: German car sales
Figure 1: German car salesSource: Marklines

Figure 1 shows the growth of German car sales in 2017 and 2018. The orange line gives the change Y-o-Y. The figure shows that in both October and November of this year car sales were about 7% lower than a year earlier. Is this really bad news? It depends on the perspective.

The pictures becomes less pessimistic if one takes the M-o-M changes into consideration. They show, that last September was a dramatically poor month. Although German car sales are always rather erratic, the decline of almost 37% M-o-M in September 2018 is exceptional. The reaction in October was rather strong (+26%) and in November growth in car sales was less spectacular, but still close to 8%. This having said, absolute car sales levels are still substantially lower than in Q3, as the 37% decline was from a much higher base than the subsequent growth figures. As a result, it will take several months in a row with above average car sales figures to wipe out September’s loss. Given the general outlook, there is no reason to expect that car sales will structurally stay at the current depressed level. But the recovery will certainly need time into 2019 Q1, which will lift growth somewhat early next year.

Business sentiment indicators point at weaker momentum, but not at recession

This being said, however, the economy appears to be slowing down. The IFO-indicators, both the leading and current indicators, are trending down since January 2018. Although the current indicator (‘business situation’) is still clearly above the expectations indicator, they both point at a lower rate of expansion of the German economy, but are not indicating that Germany is heading for a recession.

Our baseline scenario is given in Table 1. The future doesn’t look too bad for Germany. However, the risks are downwards, as the lingering trade war and the continuing saga of Brexit may have a negative impact on world trade and confidence.

Figure 2: IFO Indices point to gradual slowdown
Figure 2: IFO Indices point to gradual slowdownSource: IFO
Table 1: Economic data Germany
Table 1: Economic data GermanySource: Rabobank
Wim Boonstra
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 5128 1405

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