IHS Global:

Strong domestic demand more than doubles

quarterly German GDP growth to 0.7% in Q1

 

Frankfurt/Main (13.5.16) – Based on “flash” data released by the Federal Statistics Office (FSO), German real GDP increased 0.7% quarter-on-quarter (q/q) during the first quarter of 2016, more than double the pace of 0.3% q/q observed in the two preceding quarters and also well above the 0.4% pace of the first half of 2015. The FSO state that investment in equipment as well as construction picked up “markedly”, and both private and public consumption apparently increased significantly too (the latter partly reflecting refugee-related expenses).

This strong surge in domestic demand outweighed by far a modest negative growth contribution from net exports as import growth outpaced export growth. Based on the calendar and seasonally adjusted series, the year-on-year rate has accelerated from 1.3% to 1.6%, although this narrowly misses the interim peak of 1.7% seen in the third quarter of 2015. Unadjusted for calendar effects, however, year-on-year growth actually fell sharply from 2.1% in Q4 2015 to 1.3% in Q1 2016, reflecting a major swing in working days (two additional days in Q4, one less in Q1 compared to the year-ago quarter). As the first-quarter outcome was close to IHS expectations (0.6% q/q in our April forecast round) and as there were no revisions of any magnitude, we are maintaining our GDP growth forecast of 1.9% for 2016 (both adjusted and unadjusted for working day effects). This represents an acceleration from 1.5% on average during 2014-15.

 

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 24 May. The Federal Statistics Office (FSO) as the releasing agency has nonetheless provided some important guidance in qualitative form. We estimate that overall domestic demand, at almost 1.0% q/q, was at least as strong as in the preceding quarter. Furthermore, final domestic demand, i.e. net of inventories, most likely accelerated compared to Q4 2015 since stocks probably did not contribute to headline growth this time. The FSO statements commenting on today’s data release imply that all major components of domestic demand put in a robust performance. Special factors helping additionally in this respect are the ongoing large expenditures for refugees that are boosting public consumption and the mild winter weather that has led to a spike in construction activity. Although the latter is also supported by a general upward trend for housing demand (now exacerbated for the foreseeable future by the migrant influx), a statistical backlash can be expected for Q2 when seasonal factors always account for a spring upswing that will be smaller than usual in this case due to the elevated Q1 base. Encouragingly, investment in equipment apparently also expanded again, which had seemed somewhat uncertain given ongoing high levels of geopolitical uncertainty (Middle East turmoil, Ukraine, Greece, refugees) and emerging market woes. The environment of record-low interest rates and pent-up investment needs in the areas of housing and infrastructure is providing underlying support. The FSO did not give any clear indication about the growth pace of private consumption, but it is most likely that the mere 0.3% q/q seen in Q4 will be exceeded significantly. This would be in line with the persistently favourable background of good labour market conditions and the renewed softening of inflation in early 2016 due to oil prices lurching lower once more, aiding consumer purchasing power.

 

By contrast, external demand again had a net dampening effect on Germany’s quarterly GDP growth, although probably to a smaller extent than in Q4 (then by 0.5 percentage points). The FSO’s statement was that external demand “somewhat” braked overall growth momentum as import growth was stronger than export growth (while both categories indeed expanded, contrasting with the export decline in the previous quarter). Note that with the exception of Q4 20125, exports have been showing uninterrupted positive growth since the start of 2013. Renewed growth in Q1 is somewhat remarkable in view of a slowdown in the US and the UK, which had been very supportive during most of 2014-15. The Eurozone economy at large is gradually recovering from the debt crisis related recession of 2012-13, which is offsetting the dampening impact of weaker economic conditions in many emerging markets (importantly including China) on German exports. In fact, robust German domestic demand is one factor contributing to this Eurozone recovery via strengthening German imports. Monthly customs trade numbers, which are expressed in nominal terms and have therefore been depressed in recent times by the falling oil price, do not adequately reflect this import strength. Meanwhile, exports are benefiting not only from this improvement in economic conditions in the Eurozone, but also – with respect to trade with the rest of the world beyond the Eurozone – from the ongoing relatively weak stance of the euro. The latter’s modest appreciation since March does not fundamentally change this outlook.

 

Overall, first-quarter GDP data reinforces the dichotomy between somewhat restrained external demand and strong domestic demand. Private consumption growth should remain very robust in the quarters ahead, fueled not least by healthy price-adjusted wage and pension gains (pensioners will receive an increase by around 5% in mid-2016). In addition, labour market developments are remaining favorable, keeping job concerns at historically low levels, and record-low interest rates are depressing the savings propensity to all-time lows (GfK survey). With regard to investment in equipment, manufacturing orders have rebounded in March, the PMI sub-index for orders recovered in April, and the Ifo business climate survey has shown improvement in March/April. Building sector activity will continue to receive positive impulses from demographic influences and therefore not let up any time soon. Even the external sector should not restrain GDP growth unduly in the coming quarters, as the relative performance of exports compared to imports should move somewhat in the former’s favour as global demand gradually strengthens again. The underlying annual growth pace should remain at or even slightly above the 2% level during the remainder of 2016 and likely in 2017 as well, supported by (still) low oil prices, a weak euro, persistently soft monetary policy from the ECB, more public spending on refugees and infrastructure, and an improving overall Eurozone environment. Uncertainty linked to various geopolitical risks will be a restraining factor, but our forecast assumes that the UK will not leave the EU in the end.

 

The strong Q1 GDP outcome was very much as IHS had expected. We are therefore sticking to our GDP growth forecasts of 1.9% for 2016 and 2.0% for 2017. This translates to forecasts unadjusted for working-day effects – as used by the German government in its projections – of (also) 1.9% for 2016 and 1.8% for 2017. This still exceeds the German government’s latest official forecast of 1.7% for 2016 as we remain more optimistic with respect to private consumption dynamics and to export resilience.

Timo Klein Dipl. Volkswirt Principal Economist  IHS Economics – Western Europe