IHS Global: German GDP surprisingly helped
by net exports in Q2 to achieve solid growth of 0.4% q/q
Frankfurt/Main (14.8.16) – Based on “flash” data released by the Federal Statistics Office (FSO), German real GDP increased 0.4% quarter-on-quarter (q/q) during the second quarter of 2016, weaker than the previous quarter’s rather exceptional 0.7% q/q but broadly matching the average growth pace of the period 2013-2015. The FSO states that net exports boosted GDP growth as exports increased whereas imports surprisingly declined slightly.
This apparently offset larger-than-expected weakening of fixed investment to an outright decline versus the first quarter (affecting both equipment and construction). Private and public consumption are said to have supported GDP growth, as had been expected. On balance, overall domestic demand should still have grown modestly, but by far less than the pace of around 1% q/q (or 4% annualized) observed in the two preceding quarters. We estimate that net exports delivered a positive GDP growth contribution of 0.2 to 0.3 percentage points in Q2. Based on the calendar and seasonally adjusted series, the year-on-year rate has slipped marginally from a two-year high of 1.9% in Q1 to 1.8% in Q2. Unadjusted for calendar effects, however, year-on-year growth actually accelerated sharply from 1.5% to a five-year high of 3.1%, reflecting a major swing in working days (one day less in Q1, three days more in Q2 compared to the year-ago quarter). Although the second-quarter GDP outcome exactly matched IHS expectations (0.4% q/q in our July forecast round), fairly sizeable revisions to recent quarters that were mostly to the upside force us to raise our GDP growth forecast for 2016 from 1.6% to 1.8%. Furthermore, the resilience shown so far to the Brexit shock will lead to an increase of our forecast for 2017 from 1.4% to 1.7%. The growth pace during 2016-17 thus looks to be slightly firmer than during 2014-15, which posted an average of 1.5%.
Today’s “flash” release for the second 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 August. Looking at the qualitative guidance provided by the FSO as the releasing agency a little more closely, it seems likely that overall domestic demand in Q2 was not only dampened by retreating investment but also a reduction in the stock of inventories. Therefore final domestic demand, i.e. net of inventories, probably weakened to a relatively smaller degree, but its Q1 pace of 0.8% q/q will have been more than halved in Q2. The FSO statements do not give any clear indication about the momentum of private or public consumption, but this usually means that the growth pace was not very different from that of the previous quarter. Factors such as the support for consumer demand from persistently favourable labour market conditions and very soft inflation (aiding consumer purchasing power) or the boost to public consumption from ongoing large expenditures for refugees have not changed materially in recent months. The main reason for domestic demand deterioration in Q2 relative to Q1 is thus a recoil effect in the construction sector that had benefited from the mild winter weather early in the year. In underlying terms, construction sector prospects remain strong, owing to large housing demand (exacerbated by the migrant influx) and government efforts to boost infrastructure investment. Meanwhile, investment in equipment apparently also slipped in Q2, correcting for stronger-than-expected activity in recent quarters. This is not overly surprising in view of the increase in geopolitical uncertainty of late, coupled with persistently difficult conditions in many emerging markets. Concerns about a possible Brexit may have contributed to investment reticence, but a larger dampening effect is likely now in the second half of 2016 after the risk has actually materialized and as uncertainty about the UK’s economic future in Europe will remain high for an extended period. That being said, the environment of record-low interest rates and pent-up investment needs in the areas of housing and infrastructure is providing underlying support.
The net boosting effect of external trade on Germany’s quarterly GDP growth is a pleasant surprise. Such support for GDP was last observed a year ago in Q2 2015. Admittedly, this was more due to a setback for imports rather than buoyant exports, but the FSO spoke of only a “light” decline in imports. In any case, exports have held up better than many had feared in view of feeble global demand (including the US and the UK in recent months) and destabilizing (geo-)political conflicts in many parts of the world. With the exception of Q4 2015, exports have been showing uninterrupted positive growth since the start of 2013. The Eurozone economy at large is proving to be a support at present, as it is increasingly recovering from the debt crisis related recession of 2012-13 and associated fiscal consolidation. Indeed, robust German domestic demand since 2014 is contributing to this Eurozone recovery via strengthening German imports, thus also indirectly lifting the potential for German exports. Monthly customs trade numbers, which are expressed in nominal terms and have therefore been depressed in recent times by the low 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.
Notwithstanding the partial shift from domestic to external demand observed in the second quarter, German GDP will continue to be driven foremost by strong domestic demand in the coming quarters. Private consumption growth will receive additional support from public pension increases of around 5% enacted in July, and there is little sign that the labour market is about to deteriorate beyond the obvious impact from refugees that are increasingly looking for work after their asylum applications have been processed. Employment growth will remain robust in any case, keeping job concerns at historically low levels, and record-low interest rates are maintaining the savings propensity near all-time lows (GfK survey). With regard to investment in equipment, the PMI sub-index for orders has shown a major rebound in June (only partially corrected in July) and the Ifo business climate survey, which had been improving during March-June, slipped only modestly in July after the Brexit vote. Building sector activity will continue to receive positive impulses from demographic influences and therefore not let up any time soon. Finally, even the external sector will not be a major drag on GDP growth, as indeed the second-quarter results have demonstrated. In sum, the underlying annual growth pace will be only modestly below the 2% level during the remainder of 2016 and in 2017, as uncertainty linked to various geopolitical risks is outweighed by 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.
Our forthcoming August round GDP growth forecasts will thus be 1.8% for 2016 and 1.7% for 2017. Owing to contrasting working-day effects, this translates to unadjusted forecasts – as used by the German government in its projections – of 1.9% for 2016 and 1.5% for 2017. For 2016 at least, this is now again on the optimistic side of the market consensus and official expectations by the German government.
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