RaboResearch - Economic Research

Germany: Better than expected Q4 figures, but downside risks remain

Economic Comment

Share:
  • The German economy expanded by 0.1% in the fourth quarter, which is better than many had expected. For the year 2020 as a whole the economy shrank 5.3%
  • Services were beat down significantly by the second lockdown, but a strong manufacturing sector kept the economy afloat in the final quarter
  • Transport prices for goods from China have quadrupled recently and pose a threat to the relatively strong performance of the German economy
  • Especially the computer & electronics sector will feel the pinch of higher transport prices

German economy expands in fourth quarter

In the fourth quarter the German economy recorded a 0.1% q/q growth. For 2020 as a whole this amounts to a contraction of 5.3%. Although 0.1% q/q is only a modest growth, it was better than many, including ourselves, had pencilled in. The economy was mainly kept afloat by a strong expansion in Germany’s large industrial sector (figure 2), which is roughly a fourth of the total economy, and construction activity. The manufacturing sector fared well on an increased foreign demand (figure 3), especially because of pent up demand from China.

Even though the year ended on a positive note for the industry and manufacturing sector, the figures for the full year 2020 were still in the red. Output in these sectors declined by 9.7% and 10.4% respectively, with most of the pain taken in April and May. 

Figure 1: German economy stagnated in the fourth quarter
Figure 1: German economy stagnated in the fourth quarterSource: Destatis
Figure 2: Strong manufacturing performance compensated weak service sector activity
Figure 2: Strong manufacturing performance compensated weak service sector activitySource: Macrobond, IHS Markit

Looking back to 2020, retail sales outstripped expectations for a significant part of the year, even recording year on year growth after the first lockdown. Knowing that the VAT rate would go back up in January 2021 may have helped sales in Q4 as well. Looking forward, with non-essential shops closed until February 14, retail sales are certain to take a punch in the first quarter of this year. Although there is no official data available for December and January yet, sentiment indicates sales have tumbled since the lockdown that started December 16 (figure 4). This comes as no surprise, since we observed a 15% contraction in retail sales in the Netherlands, whilst France recorded a contraction of 28% in November when stores were shut down. On the bright side, people have been very willing to open their wallets once the stores opened again last year. Let’s hope they are just as willing to do so when the stores re-open on February 15.

Figure 3: Exports have seen a strong recovery from April onwards
Figure 3: Exports have seen a strong recovery from April onwardsSource: Macrobond, Destatis
Figure 4: Retail sales have hold up so far, but are likely to have incurred a significant blow during the second lockdown
Figure 4: Retail sales have hold up so far, but are likely to have incurred a significant blow during the second lockdownSource: Macrobond, DGECFIN, Destatis

Container spot prices skyrocket

Although the economy held up quite well in the fourth quarter, this is no guarantee for sound economic performance going forward. Currently, we have pencilled in a small economic contraction in the first quarter, but there are several downside risks. The most eminent is the risk of a further extension of the lockdown measures, but another significant risk is that of a slowdown in production, investment and consumption since the cost of shipping containers from China to Europe or the United States has more than quadrupled (figure 5 and 6).

This quadrupling of prices is due to a high shortage of containers and it is disrupting global trade. Usually, there is a continuous flow from the US to Europe to China and back to the US, but when there is a bottleneck in that chain, the whole process jams. COVID has thrown a spanner in the works. For example, containers still reside un-offloaded in ports in the US and Europe because of a shortage of truck drivers. In Sri Lanka, a major transport hub for clothing exporting countries such as Bangladesh, there are some 50.000 containers waiting in the port of Colombo to be shipped, but as long as Sri Lanka is in lockdown it will take some time before the backlog has been eliminated.

Meanwhile, some large shipping companies, such as Maersk, have withdrawn part of their fleet from trading routes during the first wave of infections in April. Ships that can hold 12.000 containers are quite costly to operate and, frankly, there was not a lot of demand for these ships since factories in China were shut tight and global trade ground to a halt.

Figure 5: Prices have soared for containers, but only for containers towards Europe
Figure 5: Prices have soared for containers, but only for containers towards EuropeSource: Freigthos
Figure 6: Prices for shipments towards the US have soared as well, albeit less
Figure 6: Prices for shipments towards the US have soared as well, albeit lessSource: Freigthos

The surge in transport cost is particularly bad news for small retailers and manufacturers. Larger companies usually have long-term service contracts (with some contingencies to adjust for higher fuel prices etc.) and thus are less affected by a change in the spot price, whilst smaller companies will have to deal with subcontractors who ask the spot price. Combined with a sharp increase in commodity prices, input prices for the industry have risen (figures 7 and 8), whilst there is no indication yet that these higher (factory gate) input prices are translating into (significantly) higher output prices.

Figure 7: Most commodity prices have risen sharply in 2020
Figure 7: Most commodity prices have risen sharply in 2020Source: Macrobond, World bank
Figure 8: Input prices are picking up again, but overall inflation remains subdued
Figure 8: Input prices are picking up again, but overall inflation remains subduedNote: The spike in inflation can be attributed to an increase in VAT-rates Source: Macrobond, Bundesbank

But not every company is equally vulnerable. For example, retailers dealing in seasonally dependent products, such as fashion, are more likely to be at a disadvantage. Average lead times on purchases have increased greatly, potentially delaying the transport of goods to such an extent that goods will be delivered after the season has passed.

Figure 9: Especially the computers & electronics sector is dependent on Asia for intermediate goods
Figure 9: Especially the computers & electronics sector is dependent on Asia for intermediate goodsSource: OECD 2019

Another sector that is also very likely to see their input price skyrocket is the computers, electronics & electrical equipment sector (figure 9), since their reliance on goods from China and eastern Asia (especially Taiwan with its large semi-conductor industry) is relatively high. Another sector is the machinery sector, which is reliant on China for its nuts and bolts.

For now, the industry is still performing above expectations and the sentiment amongst producers hasn’t been this good in a while. However supply chain issues could throw a spanner in the works. For retailers, the outlook was already pretty grim given that non-essential shops are closed. Potential supply chain issues will only aggravate these problems.

Share:
Author(s)
Erik-Jan van Harn
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 3002 0936

naar boven