IHS Global: Strong private consumption, recovering investment drive German GDP growth in Q4 while inventories restrain
Frankfurt/Main (24.2.15) – Component data now released for the fourth quarter of 2014 confirms – as already shown by flash data released by the Federal Statistics Office (FSO) on 13 February – that German real GDP rebounded strongly by 0.7% quarter-on-quarter (q/q), following net stagnation during the two preceding quarters and a strong start to the year 2014 at 0.8% q/q in Q1. The expenditure breakdown reveals that private consumption provided the biggest growth impulse, although it only matched Q3 performance at 0.8% q/q and thus failed to accelerate as the FSO had indicated on 13 February. Investment and net exports also contributed to GDP growth in Q4, jointly in fact as much as private consumption.
Within investment, construction was the main driving force (surprisingly so given subdued leading indicators about the sector) whereas investment in equipment rebounded only modestly. Inventories declined for the second quarter in a row, which bodes well for output potential in early 2015. The modest net export contribution to GDP growth was accompanied by somewhat less vigorous growth rates for both exports and imports than in Q3 2014. Overall domestic demand added 0.5% to GDP growth, and if inventory changes are taken out of the picture, final domestic demand even added 0.7%. In conjunction with the net positive impulse from external demand, underlying GDP growth momentum can thus even be said to have reached 0.9% q/q, or more than 3% in annualized terms.
Unadjusted for calendar factors, the year-on-year rate of overall GDP growth has recovered further from 1.2% to 1.6%, and the calendar-adjusted series similarly from 1.2% to 1.5%. This extends the underlying upward tendency that already began nearly two years ago at a cyclical low of -1.8% y/y (only -0.6% y/y calendar-adjusted) in Q1 2013. This upward trend experienced an interruption in the second and third quarters of 2014, owing to the ramifications of the Ukraine crisis and the negative impact of the tapering of US quantitative easing on various emerging markets, but it was then resumed in late 2014.
Looking at developments of the individual components in Q4, the breakdown reveals the following about GDP growth contributions: Net exports added 0.2 percentage points to quarterly GDP growth, following even 0.4 points in Q3 but broadly a neutral influence in the first two quarters of 2014. At the same time, domestic demand net of inventories added 0.7 points, following 0.3 points in Q3 and even a subtraction of 0.3 points in Q2 of 2014. Another drop in the stock of inventories dampened GDP growth by 0.2 percentage points in Q4, although this was less than in Q3 (-0.6 points) and follows a neutral impact on balance during the first half of 2014. Excluding inventories, domestic demand therefore boosted GDP by 0.7 percentage points in Q4, following only 0.3 points in Q3 and even causing GDP contraction of -0.3% in Q2. Among the components of final domestic demand, private consumption at 0.4 percentage points contributed the most to quarterly GDP growth, while public consumption helped only slightly (the contribution in rounded terms is 0.0 points). Fixed investment added 0.2 percentage points, unwinding a dampening effect of the same magnitude in Q3. This was almost exclusively due to construction investment, while the increase of investment in equipment was too small to show up as a GDP contribution in first decimal terms.
Private consumption at 0.8% q/q matched the pace of Q3, which is its strongest growth momentum of the past three years. Underlying conditions have become ever more supportive for consumer spending since mid-2014, as persistently healthy labour market and wage developments have been joined by sharp oil price declines and also softer food prices, which is providing consumers with additional purchasing power. At the same time, interest rates have reached new record lows, representing even more of a disincentive to save. Meanwhile, government consumption weakened from 0.6% q/q in both Q2 and Q3 to 0.2% q/q in Q4. German fiscal policy may have become somewhat looser in the wake of the grand coalition government coming to power in late 2013, but ongoing efforts to maintain a balanced public sector budget and to also reach this for the first time in over 40 years at the central government level has kept public consumption in check. Indeed, it was concurrently revealed today that Germany’s overall public sector enjoyed a budget surplus of 0.6% of GDP in 2014, which is the best fiscal performance in decades if one ignores the year 2000 when huge proceeds from the sale of UMTS frequency licenses enabled a surplus of 1.0% of GDP.
Fixed investment increased 1.2% q/q, exactly unwinding the decline in the preceding quarter that had still been impacted by a recoil effect of the weather-induced Q1 spike in construction investment. Fixed investment had already enjoyed a robust upward trend during the four quarters from Q2 2013 to Q1 2014 (cumulative increase of 7.6%), but then suffered a setback of nearly -3% during the two middle quarters of 2014. Gross overall investment, i.e. including also inventories, rebounded to a much smaller extent at 0.2% q/q, following also a much larger decline in Q3 of -4.5% q/q. This illustrates how a sizeable reduction in stocks has restrained GDP growth during the two latest quarters, owing owes to the high uncertainty levels because of the Ukraine crisis that induced firms to be cautious about output plans – although it needs to be kept in mind that the inventory measure also contains errors and omissions. The split between the two major components of fixed investment shows that equipment investment only rebounded 0.4% q/q, having declined -1.4% q/q in Q3 (nevertheless revised up from -2.3% originally), whereas construction investment increased fairly markedly at 2.1% q/q, following -1.5% q/q in Q3 (in this case revised down from -0.3%). The rebound in construction investment is quite remarkable in that leading indicators such as construction orders or the construction sub-index of the Ifo business climate survey had not indicated such an improvement in building sector activity.
The 0.2% positive growth contribution from external demand was the result of satisfactory growth in exports and imports of goods and services at 1.3% and 1.0% q/q, respectively. Export growth thus continued to outpace import growth, but to a lesser degree than in Q3 (2.0% versus 1.3%) and with somewhat more restrained momentum of trade volumes generally. This may well have been due to lagged effects of the escalation of geopolitical crises during 2014, notably in the Ukraine and in Iraq/Syria, and of problems in several key emerging markets related to the change in US monetary policy towards a less accommodative stance than seen until 2013. Indeed, although German exports generally showed surprising resilience to such negative factors during 2014, one should not overlook the declining tendency of the export orders component of Germany’s PMI survey last year (even the latest indication for February 2015 only showed an increase to 50.8, i.e. only just returning to expansion territory). One factor helping to explain this is the strengthening economic recovery in the US and the UK. Meanwhile, imports have also returned to solid positive growth rates since the second quarter of 2014, but they have not accelerated to the extent that strengthening domestic demand might have suggested. So far, imports have mainly profited from improving demand for intermediate goods imported from abroad, as required by Germany’s export sector. With private consumption picking up so strongly during the second half of 2014, fresh impulses for imports can be expected now in early 2015.
The latest indications gleaned from key leading indicators have been very encouraging. Although gains of the purchasing manager (PMI) data have still been fairly restrained, especially with respect to the manufacturing sector (services have done better), the Ifo business climate indicator and the ZEW economic expectations index have both recovered convincingly since November. In conjunction with the above-mentioned improving signals from the US and UK economies and despite ongoing Ukraine related uncertainty, Germany’s emerging fresh recovery appears well underpinned. This is certainly being helped by the significant declines of oil prices and the euro since mid-2014, which are enhancing both consumer purchasing power and Germany’s already very good competitive position in a global context. The recent launch of Quantitative Easing by the ECB, a fairly comfortable German budgetary situation, and less austere fiscal policy in many troubled Eurozone countries than during 2012-13 are additional supportive factors. Germany’s private consumption is being strengthened by pent-up demand, ongoing robust increases in disposable income, softening inflation, and a recent return to a declining unemployment trend. In addition, residential construction enjoys an ongoing upward trend due to extremely favorable financing conditions and a lot of structural demand, not least also due to unexpectedly large increases in immigration during the last 2-3 years.
Overall, IHS Global Insight in its February detailed forecast round has projected that calendar adjusted year-average German GDP growth will accelerate from 0.2% in 2013 and 1.6% in 2014 to 2.0% in both 2015 and 2016. In doubt, any future forecast adjustment in the near-term is more likely to be to the upside, especially if the Greek situation is kept under control. IHS is assuming that global growth will follow a gradual strengthening tendency and that both the Eurozone debt crisis and the Ukraine crisis do not escalate significantly anew in the coming quarters, thus not causing any major new disruptions to the sphere of the real economy. At the same time, German domestic demand will increasingly also be supported by accelerating investment growth, given waning uncertainty levels, and by a rebuilding of inventories. Quarterly GDP growth should thus maintain a pace of at least 0.5% q/q during the coming quarters, implying an annual growth pace slightly above 2%. Indeed, given a positive calendar effect of 0.25% in 2015, this year’s unadjusted GDP growth (as also used for official government forecasts) will be 2.3% already based on our February projections.
Timo Klein Dipl. Volkswirt / Senior Economist