Talking point

German GDP growth: Only 1 ½% after all

August 7, 2014

nicht löschen!!

People say that life is easier for optimists. However, this has not held true for forecasters of German economic growth for quite a while now. The good start into the year (Q1: +0.8 qoq) and the upbeat business and consumer sentiment back then had induced us in June to boost our full-year forecast from 1.5% to 1.8%. Nonetheless, we didn't relinquish our place at the lower end of the consensus, which in the meantime had climbed to 2%. If only we had kept our mouths shut!

While we had looked for a significant slowdown in GDP growth in Q2 on account of a rebound from the weather-related outperformance in Q1, this effect can only explain 0.3-0.4 of a percentage point (pp) of the Q2 downturn. Our Surprise Index provides a very "nice" illustration of the fact that the data fell short of expectations across the board. There is now a very much higher probability that GDP may have even declined a tad in Q2 owing not least to the fact that manufacturing output failed to recover properly in June (+0.3%, up from -1.7% in May).

aAnd that is not all. True, Q3 GDP is likely to be higher by the above stated 0.3-0.4 pp for purely statistical reasons, as the Q2 "rebound" falls out of the picture. It also fits that the composite PMI overcame much of its May/June slump in July, too. However, at 55.2 it is only 0.5 of a point higher than the Q2 average. Ultimately, though, the slowdown in the economy is not a result of weather-related yo-yo effects linked to seasonal adjustments. What plays a bigger role is that world trade, a key driver of the German economy, has persistently moved sideways so far in 2014. The difficulties are compounded by the Ukraine crisis. Even though Russia's share of German exports is now down to not quite 3%, shipments there had already fallen by 15% yoy by May. As sanctions were ramped up in early August the declines will probably be exacerbated in the coming months, so the full year could ultimately see a slump of 20-25% which, even following the deduction of fewer imported intermediates, is likely to hurt net exports and thus GDP to the tune of 0.25 pp. Moreover, the tensions and the undoubtedly increasing uncertainties over the next few months in view of potential retaliatory measures by Russia are set to cloud the investment climate in Germany. The 4.6% drop in domestic capital goods orders (May/June versus March/April) points in this direction – even though special factors may have overstated the impact. At any rate, the decline in the expectations component of the ifo business climate allows little hope of a near-term recovery. True, we continue to expect the global economy to stage a recovery – not least because the data coming out of the US have finally improved. However, the factors discussed here are poised to curb Germany's growth dynamics in H2. For this reason we have reduced our GDP forecast by 0.1 pp in both Q3 and Q4, to 0.4% and 0.3% respectively, so this pushes our full-year forecast for annual average growth back down to 1 ½%.

The weaker growth in H2 2014 also reduces our GDP forecast for 2015 by 0.2 pp, to 1.8%. This results from the prospect of a lower growth overhang. There is a caveat though: the underlying – pretty substantial – average quarterly growth rates of 0.4% hinge not only on a revival of world trade, but also on a de-escalation of the Ukraine conflict.




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