German: Q1 GDP growth accelerates to 0.6% q/q, investment and net exports provide fresh momentum

Frankfurt/Main (12.5.17) – Based on “flash” data released by the Federal Statistics Office (FSO), German real GDP increased 0.6% quarter-on-quarter (q/q) during the first quarter, accelerating from 0.4% in Q4 and 0.2% in Q3 last year (latter revised up from 0.1%). This broadly confirms market expectations. Revisions were too slight to change previously released full-year growth of 1.8% in 2016 (calendar-adjusted). The quarterly growth pace in early 2017 compares favourably to the 0.4% average during the period 2013-2016. The FSO highlights that external trade momentum picked up and that net exports contributed to first-quarter GDP growth due to exports growing more strongly than imports – contrasting with developments during the two preceding quarters.

IHS Markit estimates that net exports on their own boosted quarterly GDP growth by 0.2-0.3 percentage points. As concerns domestic demand components, investment was apparently the driving force in the first quarter. Helped by mild winter weather, investment in construction apparently grew strongly, investment in equipment also increased markedly. By contrast, private and public consumption rose only modestly. Overall domestic demand, which had suffered a setback in Q2 2016 before recovering to 0.9% in the final quarter of last year, appears to have grown by a much weaker 0.3-0.4% q/q in Q1. This slowdown is seen to be largely related to a swing in changes of stocks, however. Based on the calendar and seasonally adjusted series, the year-on-year rate for total real GDP has edged down from 1.8% to 1.7%. This growth pace has hardly changed during the past five quarters. Unadjusted for calendar effects, however, first-quarter annual growth was 2.9% y/y, up sharply from only 1.3% in the previous quarter as calendar effects swung the other way (three extra working days instead of one less in the year-ago period). Although first-quarter GDP growth was about 0.1% below our expectations, strengthening momentum of investment and external trade alongside a sustained improvement of leading indicators in recent months bodes well for economic activity during the remainder of 2017. We expect average growth in the next three quarters to also be 0.6% q/q, and we will raise our GDP growth forecast for 2017 from 1.9% to 2.0% in calendar-adjusted terms. This equals 1.8% in non-adjusted terms.

Today’s “flash” release for the first quarter as usual encompassed only data for the overall GDP aggregate and not the individual components. The latter will only be made available on 23 May. Looking at the qualitative guidance provided by the FSO a little more closely, it seems clear that private consumption remained relatively subdued and public consumption lost momentum in early 2017. By contrast, fixed investment, propelled by both construction and equipment, accelerated markedly, so that final domestic demand, i.e. net of inventories, was little changed at 0.5-0.6% q/q. This is somewhat stronger than the 0.4% average observed during 2014-16. Thus the dip in total domestic demand from 0.9% q/q in the final quarter of 2016 to roughly 0.3-0.4% in Q1 is completely due to inventories. Following a build-up to the tune of 0.3% of GDP in Q4 2016, IHS Markit estimates that inventories declined by about 0.2% of GDP in Q1. Furthermore, underlying factors impacting private and public consumption remain very supportive, suggesting that these components will strengthen again in the coming quarters. Private consumption continues to be underpinned by the ongoing improvement in labour market and income conditions and should thus overcome the recent setback related to the surge in headline inflation that has reduced real purchasing power. Government consumption is being supported by expenditures for refugees. Meanwhile, the construction sector may have received an extra boost in Q1 from a mild winter, which will trigger a recoil effect in Q2, but a combination of large demographic pressure for residential building (including pent-up demand), persistently favorable financing conditions, and government efforts to boost infrastructure investment will ensure strong growth impulses from this sector for many quarters to come. Finally, investment in equipment appears to have shed the shackles of global political uncertainty linked to events such as the Brexit and the US election outcome. Investors seem to have come to the conclusion that the threat of US president Trump disrupting global trade patterns via protectionist measures has been overblown.

With regard to the external sector, monthly trade data has already been signaling rising momentum in both directions since August 2016. This indicates generally accelerating economic activity. Exports are coping increasingly well with the anti-globalization challenges posed by events such as Brexit and the Trump presidency in the US. This is also linked to demand in the Eurozone economy at large becoming more and more supportive now, given a partial recovery from the debt crisis and associated fiscal consolidation efforts. Robust German domestic demand since 2014 has contributed to this Eurozone recovery via strengthening German imports, which in turn is now benefiting the German economy via increased export potential. In addition, the ongoing relatively weak stance of the euro is helping exports to the rest of the world beyond the Eurozone. With this in mind, there is no clear-cut implication for the sign of net exports in the coming quarters, but it is worth remembering beyond any direct impact that strengthening growth of both exports and imports also has positive knock-on effects for domestic demand growth.

In the coming quarters, German GDP will continue to be driven foremost by robust domestic demand. The labour market has retained its improving trend for longer than had been expected in view of the impact from refugees that are increasingly looking for work after their asylum applications have been processed. Employment growth has remained very robust, keeping job concerns at historically low levels, and extremely low interest rates are holding down the savings propensity. With regard to investment in equipment, the PMI sub-index for orders reached a near-six-year high in March and the Ifo business climate index has similarly climbed to its highest level since mid-2011 recently. Building sector activity will continue to receive positive impulses from demographic influences and therefore not let up any time soon. Oil prices are remaining fairly low when compared with 2011-14, the ECB will not abandon its extremely soft monetary policy for some time yet, and German fiscal policy will also remain biased towards expansion given record tax revenues and spending needs for refugees and infrastructure investment. Meanwhile, net exports should be broadly neutral for GDP growth in 2017 as global demand strengthens. In sum, Germany’s underlying annual growth pace should stay close to 2.0% in the next few quarters.

Our forthcoming May round GDP growth forecast for 2017 will be raised from 1.9% to 2.0%, and we now also expect 2.0% in 2018. Owing to dampening working-day effects both this year and next (more so in 2017), this translates to unadjusted growth – as used by the German government in its projections – of 1.8% in 2017 and 1.9% in 2018.

Timo Klein