IHS Global: German GDP growth subdued in Q4 2015 by negative net exports and weaker-than-expected private consumption
Frankfurt/Main (12.2.16) – Based on “flash” data released by the Federal Statistics Office (FSO), German real GDP increased 0.3% quarter-on-quarter (q/q) during the fourth quarter of 2015, failing to show the hoped-for acceleration following also 0.3% q/q in Q3 and 0.4% q/q in each of the two initial quarters of 2015. An encouraging increase in investment (most notably construction) and a refugee-related pick-up in public consumption only sufficed to compensate for a negative growth contribution from net exports and only weak expansion of private consumption. Based on the calendar and seasonally adjusted series, the year-on-year rate has softened from a six-quarter peak of 1.7% in the third quarter to 1.3% in the fourth quarter of 2015. Unadjusted for working-day discrepancies, however, year-on-year growth actually strengthened from 1.7% in Q3 to 2.1% in Q4, reflecting two extra working days. Meanwhile, calendar-adjusted growth in 2015 overall has been revised down from originally released 1.5% (14 January) to 1.4%, although rounding overstates matters. The IHS forecast for 2016 will be reduced slightly from 2.0% to 1.9%, which translates to 2.0% unadjusted for working day effects (up from 1.6% in 2014 and 1.7% in 2015).
Today’s “flash” release for the fourth 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 February. The Federal Statistics Office (FSO) as the releasing agency has nonetheless provided some important guidance in qualitative form. Domestic demand remained broadly as robust as in the preceding quarter, in this case driven by public consumption and rebounding fixed investment. The former can be attributed to rising expenditures for refugees, while investment was mostly boosted by construction in the final quarter of 2015 as demand for housing is increasing for both domestic reasons and due to the migrant influx. Investment in equipment also expanded (unlike in Q3), but apparently with much less momentum than construction. The environment of record-low interest rates and pent-up investment needs in the areas of housing and infrastructure is helping, whereas ongoing high levels of geopolitical uncertainty (Middle East turmoil, Ukraine, Greece, refugees) and emerging market woes act as restraint on firms’ investment plans. Meanwhile, private consumption also grew in Q4 but seemingly at a slower pace than in the third quarter, which is somewhat disappointing in view of the persistently favourable background of good labour market conditions and softening inflation.
External demand had a net dampening effect on Germany’s GDP growth numbers in Q4 that was of a similar magnitude as in Q3, therefore around 0.3-0.4% of GDP. The difference with the previous quarter is that both exports and imports declined in Q4, whereas they had still grown in Q3. Thus imports did not shrink as much as exports in the final quarter of 2015. Exports had previously shown positive growth for eleven consecutive quarters. In Q4, a still improving Eurozone economy and robust growth in the US and the UK were no longer sufficient to offset worsening economic conditions in many emerging markets (importantly including China). By contrast, robust German domestic demand is continuing to give its trading partners in the Eurozone fresh impulses via German imports. Monthly customs trade numbers have already been displaying stronger import growth than export growth in all months but one since June 2015. That being said, improving economic conditions in the Eurozone and the ongoing weak stance of the euro will prevent any significant decline in exports, which should actually strengthen modestly again during 2016.
Overall, fourth-quarter GDP data underlines a deepening dichotomy between fairly weak external demand and persistently robust domestic demand. As the main reason for a somewhat disappointing overall performance in Q4 2015 is that private consumption growth was weaker than expected (the other components of demand all behaved more or less as expected), there is potential for acceleration in GDP growth in Q1. Factors that influence private consumption – labour market developments, real income, savings propensity in low-interest times – have all remained very favourable to date, arguing for a bounce-back in consumer demand. Furthermore, the relative performance of exports compared to imports should move somewhat in the former’s favour, thus reducing the external burden on GDP growth. Finally, orders for investment in equipment have stabilized in late 2015 and building sector activity is expected to receive ongoing impulses from demographic influences. The underlying annual growth pace should therefore be close to 2% in the quarters ahead, notwithstanding December/January downward corrections of the manufacturing PMI and Ifo leading indicators. Economic growth will derive ongoing support from low oil prices, a weak euro, persistently soft or even softer monetary policy from the ECB, more public spending on refugees and infrastructure, an improving overall Eurozone environment, and a solid US recovery. Uncertainty linked to various geopolitical risks will be a restraining factor, especially for exports and investment in equipment. Net exports are increasingly shaping up to be a net burden for GDP growth in 2016, although it is worth keeping in mind that the existing large gap between (higher) export levels and import levels necessitates much higher import than export growth in order to lead to a diminishing trade surplus and thus weigh on GDP growth.
The softer-than-expected Q4 GDP data in combination with slight downward revisions to Q2 and Q3 2015 data force IHS to reduce its forecast for German real GDP growth in 2016 from 2.0% to 1.9%. Given a calendar effect of 0.1%, the unadjusted number as also used by the German government in its projections is therefore lowered by IHS from 2.1% to 2.0%. This still exceeds the German government’s latest official forecast of 1.7% as we remain more optimistic with respect to private consumption dynamics and to export resilience.
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