German: GDP growth slows to 0.3% q/q in Q1 as recovering domestic demand can only partially offset drop in external trade
Frankfurt/Main (24.5.18) – Component data now released for the first quarter of 2018 confirms – as already shown by flash data released by the Federal Statistics Office (FSO) on 15 May – that German real GDP increased 0.3% quarter-on-quarter (q/q). This is well below the 0.7% average during 2017 and even slightly less than the 0.4% quarterly average observed during 2013-2016. The headline number hides that domestic demand growth actually accelerated while net exports switched from being a major contributor to GDP growth in late 2017 to being a (small) burden. Final domestic demand, i.e. net of inventories and ignoring the contribution of external demand, recovered markedly. This owes to private consumption and especially fixed investment, whereas public consumption was a drag because the post-election delay to a new government and therefore budget dampened expenditures. The outcome for individual expenditure components was close to our expectations formed on the basis of FSO indications in their press release of 15 May – except for private consumption that surprised positively.
The year-on-year growth rate of overall GDP unadjusted for calendar factors has declined from 2.3% to 1.6% y/y and that of the seasonally and calendar-adjusted series from a six-year high of 2.9% to 2.3% y/y. This compares to a 1.8% average during 2014-16 and just 0.6% during 2012-13. There were only slight revisions to the component data of previous quarters that broadly cancelled each other out for overall GDP.
Looking at first-quarter developments of the individual components in more detail, the breakdown reveals the following about GDP growth contributions: Net exports subtracted 0.1 percentage points from quarterly GDP growth, contrasting with addition of 0.4-0.5% in the two preceding quarters. By contrast, domestic demand net of inventories picked up from 0.2% to 0.5% q/q, its fastest pace since the second quarter of 2017. Inventories subtracted marginally from GDP growth in Q1, just as in Q4. Looking back at the period since mid-2016, there has nonetheless been a net build-up of inventories, which underpins the impression that the German economy has coped quite well with disturbances from the political sphere in that period (UK decision for Brexit, election of Donald Trump as US president, concerns about populists potentially dictating the political agenda in key Eurozone countries after the elections of 2017). Among the components of final domestic demand, private consumption and fixed investment were the key factors behind the rebound, with construction and “other investment spending” (intellectual property, livestock, agricultural crop) leading the way.
Private consumption growth of 0.4% q/q implies that the stagnation phase of the second half of 2017 has been overcome, although this remains weaker than the average pace of 0.65% q/q in the first half of last year. The interim pause in consumer spending growth may well be linked to the marked upturn in inflation from only around 0.5% in Q3 2016 to roughly 2% in early 2017, which hurt consumers’ spending propensity with a delay of a few months as they gradually became aware of rising prices. By early 2018, consumers had apparently gotten used to the new inflation environment while healthy labour market and more recently also wage developments provide fresh purchasing power. This is supported by the fact that interest rates remain very low despite recent increases, which means that consumers continue to find saving in interest-bearing instruments an unattractive alternative.
Government consumption posted -0.5% q/q in the first quarter, contrasting sharply with the increases of around 0.5% in the three preceding quarters. This outcome was heavily influenced by the absence of a regular budget (owing to the 6-month delay to forming a new government after the September 2017 elections), as the administration has been forced to run on the previous year’s budget until now. The projected (moderate) loosening of German fiscal policy will probably only appear in the data from Q3 onwards, as the 2018 budget bill will only be finally passed in mid-year. Nevertheless, continued strong tax revenue growth and resulting budget surpluses (around 1% of GDP in 2017) suggest that Germany’s fiscal purse strings will lean towards loosening in the quarters ahead.
Fixed investment rebounded sharply from 0.3% to 1.7% q/q, its fastest pace in a year. This is remarkable in view of the further increase in global uncertainty levels during 2018 so far, thanks in good part to US president Trumps initiatives with respect to trade protectionism and Iran. All investment components contributed, with construction providing the largest contribution (2.1% q/q) after two quarters of more or less stagnation. This confirms expectations formed on the basis of persistently encouraging recent leading indicator evidence regarding the building sector in recent months (e.g. the construction sub-index of the Ifo business climate survey and monthly construction orders data). Investment in equipment also grew quite well at 1.2% q/q, and “other investment” (intellectual property, livestock, agricultural crop) rebounded by 1.5% q/q after a marginal decline in Q4. Note that gross overall investment, i.e. including also inventories, has thus recovered to 1.1% q/q from -0.2% q/q in the final quarter of 2017. There has been a slight decline in the stock of inventories in the two quarters saddling the turn of the year 2017/18.
There was a small negative contribution to GDP growth of -0.1% from external demand despite similarly sized declines of exports and imports of goods and services at around -1% q/q. This is a consequence of absolute levels of exports being much higher than those of imports. The decline in trade volume growth in early 2018 reflects the increase in global political uncertainty and the associated concerns about trade impediments from protectionist measures. Between mid-2014 and the end of 2017, exports and imports both grew at a solid average pace of 1.2% q/q. Note that the export orders component of Germany’s PMI survey has dropped from a 21-year high of 63.2 in December 2017 to 52.4 in May, suggesting that trade volumes will remain subdued at least in the second quarter. Imports may remain a little more resilient, arguing for net exports at least not being a contributor to GDP growth in the months ahead and possibly a mild burden.
The latest indications gleaned from key leading indicators generally argue for a further loss of underlying growth momentum during the remainder of 2018. That being said, a technical rebound for overall GDP is expected in light of the many one-off factors subduing growth in Q1 (strikes, flu epidemic, constellation of public holidays, no regular government budget for 2018 available). Furthermore, consumer purchasing power should receive a boost from fairly high wage settlements in key sectors (metal, public, construction) that are becoming effective in the second quarter. Also, robust employment growth shows little sign of letting up as yet. The expansionary course of both monetary policy by the ECB and fiscal policy from the government (expenditures on refugees and infrastructure are rising, financed by the existing budget surplus) will remain in place throughout 2018. Furthermore, residential construction enjoys an ongoing upward trend due to extremely favorable financing conditions and a lot of structural demand, not least due to the large number of immigrants that require housing. Risks remain with respect to any major protectionist steps in the US, but Germany’s domestic economy has developed a large degree of intrinsic resilience in recent years that should cushion any damaging external influences.
Overall, IHS Markit expects growth of 0.8% q/q in the second quarter to be followed by moderation towards the 0.5% area thereafter. This should result in calendar adjusted year-average German GDP growth of 2.4% this year and a more restrained pace of 2.0% in 2019. Unlike the period 2015-17, when differences in working days had a distorting impact, the growth forecasts in unadjusted terms (as used for official government predictions) are also 2.4% and 2.0% for 2018 and 2019, respectively. –
Best regards, Timo Klein.