IHS Global: Magnitude of investment and export growth surprises positively in German Q1 GDP data
Frankfurt/Main (24.5.16) – Component data now released for the first quarter of 2016 confirms – as already shown by flash data released by the Federal Statistics Office (FSO) on 13 May – that German real GDP increased 0.7% quarter-on-quarter (q/q), roughly double the average (and fairly uniform) pace observed during the four quarters of 2015. The Q1 expenditure breakdown reveals that fixed investment was even firmer than had been expected on the basis of FSO indications on 13 May, especially with respect to equipment spending. Private and public consumption growth were both solid but not buoyant, and net exports weighed only slightly on overall GDP growth.
Overall domestic demand growth maintained the previous quarter’s very robust pace of 0.8% q/q, or more than 3% annualized. Inventories added 0.1 percentage point to quarterly GDP growth (same as in Q4), so that final domestic demand also repeated the previous quarter’s 0.7% q/q. This is about twice the long-run average and stronger even than the average pace of 0.5% seen during the past three years in which domestic demand has already been relatively robust. As regards external demand, the slight drag on GDP growth in Q1 resulted entirely from imports expanding at a faster rate than exports, whereas exports per se posted a solid increase, more than unwinding the brief dip seen in the final quarter of 2015. Unadjusted for calendar factors, the year-on-year rate of overall GDP growth has softened from 2.1% to 1.3%, but this owes entirely to a large dampening calendar effect. The seasonally and calendar-adjusted series actually strengthened from 1.3% to 1.6%. Overall, underlying annualized GDP growth momentum in the German economy is therefore at or even slightly above 2% now, up from around 1.5% during 2015.
Looking at developments of the individual components in Q1 in more detail, the breakdown reveals the following about GDP growth contributions: Net exports subtracted only 0.1 percentage point from quarterly GDP growth, having subtracted 0.4 points on average in the two preceding quarters. Domestic demand net of inventories added 0.7 points, which matches the pace already seen since Q4 2014 (except for a short-lived dip to 0.1% in Q2 2015). A light increase in the stock of inventories boosted GDP growth by 0.1 percentage point, as in Q4. Inventories have now not been falling anymore since mid-2015, reinforcing the impression that companies no longer strive to cut down on stocks despite ongoing geopolitical and emerging market concerns that restrain expectations about future demand. Among the components of final domestic demand, private and public consumption contributed 0.2 and 0.1 percentage points, respectively, to quarterly GDP growth in Q1. Fixed investment even added 0.4 point, of which 0.1 point came from investment in equipment and 0.2 point from construction investment (discrepancy due to rounding).
Private consumption at 0.4% q/q was solid, repeating the pace of Q4. This falls somewhat short of the 0.6% average observed between mid-2014 and Q3 2015, however. Given the persisting, extremely supportive domestic environment for consumer spending, including healthy labour market and wage developments, still fairly low oil and food prices that are keeping purchasing power at a high level, and a recently reinforced extremely soft monetary policy by the ECB that keeps interest rates near record lows and makes saving unattractive, this is slightly disappointing and suggests that pent-up demand will provide growth support in the coming quarters.
Meanwhile, government consumption growth decelerated from the previous quarter’s interim peak of 0.9% to 0.5% q/q. This is also somewhat surprising given the ongoing loosening tendency of German fiscal policy (more spending on infrastructure and slightly reduced income taxation as of January) and the persisting need to care for a large number of migrants/refugees, although the inflow of new arrivals has slowed down considerably in recent months. Furthermore, tax revenues continue to surprise to the upside, driven by growing employment and fairly healthy wage increases. This has already enabled a budget surplus of 0.7% of GDP in 2015, putting Germany in the favourable position of being able to provide fiscal stimuli without seriously risking renewed slippage into deficit during 2016-17.
Meanwhile, fixed investment increased 1.8% q/q, accelerating from 1.4% q/q in Q4 and only 0.1% q/q in Q3 2015. Importantly, this was not only due to construction, which profited once again from another unusually mild winter, but also due to significant strengthening of investment in equipment. The latter is quite encouraging in view of a persistently high level of global uncertainty (Middle East unrest and associated terrorism, lingering Eurozone debt crisis, destabilizing impact of refugee crisis) that is not conducive to making long-term commitments based on expectations about future demand. Equipment investment accelerated from 1.0% to 1.9% q/q, construction investment – which constitutes about 50% of overall fixed investment versus just 32% for investment in equipment – from an already high 2.0% to 2.3% q/q. “Other investment” (software, R&D, licenses/patents, etc.) was weak at only 0.2% q/q, however. Latest leading indicator evidence regarding the building sector, such as the construction sub-index of the Ifo business climate survey or the number of building permits (up 30% q/q in Q1) suggest that construction sector activity will stay strong during the remainder of 2016 – strength in Q1 was thus not just weather related. Separately, note that gross overall investment, i.e. including also inventories, has accelerated from 2.1% q/q to 2.3% q/q.
The negative growth contribution of -0.1% from external demand was the result of an increase in exports of goods and services (1.0% q/q) being exceeded by their imports counterpart (1.4% q/q). Exports nonetheless improved more than imports relative to Q4 2015, when the former had declined 0.6% q/q whereas imports had increased 0.5% q/q. Accordingly, the drag from net exports on overall GDP growth was much smaller than in Q4 (then -0.5%). Nevertheless, imports have now outperformed exports in growth terms during five of the past six quarters. During that period, exports only grew at 0.9% on average whereas imports boasted growth of 1.3% q/q. Much of this difference stems from the export dip in Q4 2015, when German exports finally paid some tribute to the economic problems in many key emerging markets during 2015. That being said, the export orders component of Germany’s PMI survey peaked at a 22-month high in December 2015 that has now also been reflected in the GDP data for Q1. This PMI component has corrected somewhat during 2016 so far, albeit remaining in expansion territory. Imports have increasingly reflected the acceleration in domestic demand, but they too are being restrained by the limited magnitude of export momentum because the latter implies subdued demand for intermediate goods imported from abroad.
The latest indications gleaned from key leading indicators have been modestly encouraging again. Thus purchasing manager (PMI) data and the indices of the Ifo business climate and ZEW surveys have on balance been rebounding again since March. At the same time, the German service sector remains very robust due to the ongoing support to consumer purchasing power provided by healthy employment and wage growth. In addition, both monetary policy (the ECB has expanded its quantitative easing program even further in March) and fiscal policy (expenditures on refugees and infrastructure will rise, financed by the existing budget surplus) are providing stimuli. Finally, residential construction enjoys an ongoing upward trend due to extremely favorable financing conditions and a lot of structural demand, not least also due to the large number of immigrants that have to be housed in some way or another. On balance, these factors are offsetting the dampening influence stemming from weaker emerging market demand.
Overall, IHS Global Insight has projected in its May forecast round that calendar adjusted year-average German GDP growth, following 1.6% in 2014 and 1.4% in 2015, will accelerate to 1.9% in 2016 and 2.0% in 2017. Unadjusted for calendar factors (as used for official government forecasts), growth acceleration will be more modest from 1.7% in 2015 to 2.0% in 2016. It should be kept in mind that the export-dependent manufacturing sector, which is the main focus of attention of the key leading indicators, only represents about a quarter of the German economy. Those sectors with the highest growth momentum at present, namely services, construction, and government consumption, are grossly underrepresented in those leading indicators. As such, the underlying pace of economic growth, which is at or even slightly above 2% at present, is easily underestimated. Furthermore, the unexpected momentum of investment growth lately (importantly also with respect to equipment) should encourage with regard to near- and also medium term growth prospects. Quarterly GDP growth will fluctuate around 0.5% q/q during the coming quarters, implying an annual growth pace in the region of 2%.
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