IHS: Details of German GDP data in Q2 reveal unexpectedly weak consumption, stronger-than-expected net exports, large destocking

 

Frankfurt/Main (25.8.15) – Component data now released for the second quarter of 2015 confirms – as already shown by flash data released by the Federal Statistics Office (FSO) on 14 August – that German real GDP increased 0.4% quarter-on-quarter (q/q), following 0.3% q/q in Q1, 0.6% q/q in Q4 2014, and broadly stagnation during the two middle quarters of 2014. The Q2 expenditure breakdown reveals that private (and also public) consumption growth lost considerable momentum and fixed investment suffered a major setback related to both equipment and construction, whereas net exports added a larger-than-expected 0.7 percentage points to quarterly GDP growth. Overall domestic demand growth was even slightly negative due to a large concurrent drop in inventories that burdened GDP by 0.4 percentage points (while revisions to Q1 data have reduced the previously released negative impact of stocks from -0.3% to -0.1%). The growth boost from net exports in Q2 was caused by export growth being almost three times as strong as import growth. By contrast, domestic demand subtracted 0.3% from GDP growth, unlike the large positive contributions in Q4 2014 (0.9%) and Q1 2015 (0.5%). This overstates underlying developments, however, as inventory changes had a major impact. If these are excluded, the GDP growth contribution of final domestic demand only weakened to 0.1% in Q2, following 0.6% in Q1 and 0.9% in Q4 2014. Nevertheless, underlying GDP growth momentum was at its weakest in Q2 for a year (-0.3% final domestic demand contribution in Q2 2014).

 

Unadjusted for calendar factors, a base effect (in turn related to a difference in working days) has nonetheless boosted the year-on-year rate of overall GDP growth from 1.2% to 1.6%, and the seasonally and calendar-adjusted series from 1.1% to 1.6%. In both 2014 and 2015, the second quarter suffered from a recoil effect in the construction sector, which had benefited from mild winter weather in the first quarter. On balance, the underlying upward tendency that already began after a cyclical low of -0.5% y/y in Q1 2013 remains intact.

 

Looking at developments of the individual components in Q2, the breakdown reveals the following about GDP growth contributions: Net exports added 0.7 percentage points to quarterly GDP growth, having subtracted 0.3 points in Q4 2014 and 0.2 points in Q1. At the same time, domestic demand net of inventories added only 0.1 point, following much higher contributions of 0.9 points in Q4 2014 and 0.6 points in Q1. For comparison, this measure had stagnated on average during the two middle quarters of 2014. A fairly large drop in the stock of inventories dampened GDP growth by 0.4 percentage points in Q2, following a neutral influence in Q4 2014 and an only slight dampening effect of 0.1% in Q1. During the last four quarters, declining stocks subtracted a cumulative 1.2% from GDP growth. Among the components of final domestic demand, private and public consumption each contributed 0.1 percentage points to quarterly GDP growth, while fixed investment subtracted 0.1 point. The breakdown for fixed investment shows that this was due to construction investment alone, whereas equipment spending was broadly flat.

 

Private consumption at 0.2% q/q grew at a much reduced pace compared to the 0.7% average in the three preceding quarters. This was the case despite there being next to no change in the very supportive domestic environment, including persistently healthy labour market and wage developments and much lower oil and food prices than for instance a year earlier, giving consumers additional purchasing power. Furthermore, the ECB’s policy of quantitative easing that started in March has helped to reduce interest rates to record lows in April (since partially corrected), representing a major disincentive to save. Meanwhile, government consumption growth also halved to 0.3% q/q in Q2, which compares to a fairly steady average growth pace of 0.5% in the five preceding quarters. This slippage in Q2 has occurred despite German fiscal policy having become looser in the wake of the grand coalition government coming to power in late 2013, also enabled by tax revenues being so strong that the public sector can easily maintain a balanced budget or even a small surplus anyway. Indeed, a separate publication by the Federal Statistics Office today put the public sector budget surplus according to Maastricht criteria at 1.4% of GDP in the first half of 2015. Although intra-year shifts are likely to dampen this figure for the full year 2015, budgetary constraints are certainly not a major problem for fiscal expenditures at present.

 

Fixed investment declined -0.4% q/q, representing a setback after two quarters with average growth of 1.5% q/q. This is a similar development to what had happened a year ago – fixed investment interrupted a robust upward trend begun in Q2 2013 by posting a cumulative decline of -2.2% during the two middle quarters of 2014. Then, as now, a recoil effect of a weather-induced spike in construction investment in the first quarter played a role. Indeed, the split between the two major components of fixed investment shows that equipment investment also weakened from 1.9% q/q in Q1 to just 0.1% q/q in Q2, but construction investment – which constitutes about 50% of overall fixed investment versus just 32% for investment in equipment – even deteriorated from 1.8% to -1.2% q/q. Leading indicator evidence from construction orders and even more so from the construction sub-index of the Ifo business climate survey signal that a renewed rebound is looming in Q3. Note too that gross overall investment, i.e. including also inventories, deteriorated much more sharply than fixed investment alone, namely from 1.2% to -2.3% q/q, which reflects the above-mentioned impact of a sizeable reduction in stocks. This can be explained at least in part by the heightened uncertainty in Europe due to the tug-of-war between Greece and its creditors throughout the second quarter.

 

The positive growth contribution of 0.7% from external demand was the result of strong growth in exports of goods and services at 2.2% q/q that clearly outpaced import growth of 0.8% q/q. This contrasts with the negative contribution of net exports during the two preceding quarters (-0.3% in Q4, -0.2% in Q1), when imports grew faster than exports. Looking at the average of the last four quarters, export growth of 1.6% q/q (thus over 6% annualized) exceeded import growth of 1.3% q/q (roughly 5.5% annualized). Recent German export performance is quite encouraging against the background of escalating geopolitical crises (Ukraine, Iraq/Syria) and worsening problems in several key emerging markets during the past 15-18 months. Furthermore, the export orders component of Germany’s PMI survey has on average been hovering only slightly above the neutral level of 50 since mid-2014 – although there was a significant improvement to an 18-month high of 52.8 in August now. One factor helping to explain this is the solid economic recovery in the US and the UK, whereas lag effects mean that the weakening euro since mid-2014 has only boosted exports more strongly in recent months. Imports have increasingly reflected the acceleration in domestic demand that has developed since mid-2014, although Q2 developments have in fact been a setback in this regard. Improving demand for intermediate goods imported from abroad, as required by Germany’s export sector, has cushioned the size of this loss in import momentum.

 

The latest indications gleaned from key leading indicators have been cautiously positive on balance. The purchasing manager (PMI) and Ifo business climate data have improved again during July/August, whereas the ZEW index, which is strongly influenced by sentiment in financial markets, continued to slip lately. Overall, Germany’s recovery remains well underpinned, helped by the significant declines of oil prices and the euro since mid-2014. Consumer purchasing power and German external price competitiveness are thus very supportive. The launch of Quantitative Easing by the ECB in March, a comfortable German budgetary situation, and less austere fiscal policy in many troubled Eurozone countries than during 2012-13 are additional helpful factors. Germany’s private consumption is being strengthened by ongoing robust increases in disposable income, near-zero inflation, and very supportive labour market conditions. 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 and especially in recent months. All these factors should shield to a large extent against the fall-out of the recent disappointment about Chinese growth prospects.

 

Overall, IHS Global Insight has projected in its August forecast round  that calendar adjusted year-average German GDP growth will accelerate from 0.4% in 2013 and 1.6% in 2014 to 1.7% in 2015 and 2.1% in 2016. This can be maintained despite the recent increase in concerns about China, as the removal of acute Greek worries due to the country’s deal with its creditors is an offsetting factor with respect to intra-European growth prospects. At the same time, German domestic demand will increasingly 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 around 0.5% q/q during the coming quarters, implying an annual growth pace near 2%. Indeed, given positive calendar effect this year and next, IHS expects unadjusted GDP growth (as also used for official government forecasts) at 1.9% in 2015 and 2.2% in 2016. Timo Klein Dipl. Volkswirt/Senior Economist IHS Economics  – Western Europe