Increasing headwinds but fiscal surplus (still) rising

The 0.2% qoq drop in Q3 GDP was, of course, largely due to the WLTP effect, but underlying growth has also clearly slowed in 2018. After mustering 1.6% in 2018, we expect German GDP to expand by 1.3% in 2019. Growth should be only marginally higher in 2020, despite a strong positive working day effect, as a further slowing of the global economy and EUR appreciation will provide considerable external headwinds. [more]

GDP stagnation in Q3 – 2019 forecast lowered to 1.3%. Despite signs that the WLTP effect is subsiding the recovery looks set to be slow. Export expectations and business sentiment in general have become more clouded on the back of the US/China trade conflict, the problems in the EMs and overall heightened economic uncertainty. Whilst we expect the economy to get back on track in the winter half-year, expansion rates well above potential have become unlikely in 2019. We have therefore trimmed our 2019 growth forecast to 1.3% (1.7%). (Also included in this issue: Auto industry, labour migration, the race for Chancellor Merkel’s succession) [more]

German economy in H2 still goldilocks despite external headwinds. We maintain our forecast of around 0.5% quarterly GDP growth in both Q3 and Q4, following average growth of 0.4% in H1. The H1 growth composition, however, marginally lowers the annual average to 1.9% (2.0%) and risks remain more skewed to the downside. In Berlin, the Groko agreed on an expensive social policy package. Albeit medium- and long-term financing of the package is not secured, FM Scholz came up with an additional, even more costly idea for extended pension benefits. A silver lining could be if the Groko managed to launch a law on labour migration. (Also included in this issue: German manufacturing industry, shortage of qualified workers in the construction sector, corporate taxes) [more]

The month of June was marked by various political irritations which of course also had a certain impact on economies and markets. The US-EU trade conflicts seems set to broaden beyond steel and aluminium. The threat of imposing tariffs on US car imports will be felt particularly in the export-driven German car industry which already has to deal with stricter regulations and a cyclical slowdown in important export markets. On the domestic front, the German retail sector is facing ongoing structural change due to digitalisation. The German government crisis between the CDU and the Bavarian CSU over the course of the asylum policy is still not settled despite the rather constructive outcome of the EU summit. The various party bodies will convene and later on Monday there will be another meeting between Chancellor Merkel and Interior Minister Seehofer. In view of the factors weighing on economic sentiment, we consider our recent adjustment of our annual GDP growth forecast from 2.3% to 2% to be justified. [more]

In April industrial production remained sluggish and new orders heavily declined, Q2 M&E investment growth could be restrained. No positive impulses are expected from net exports as long as international trade tensions continue. For these reasons, we have recently adjusted our annual GDP growth forecast from 2.3% to 2%. Impulses for Q2 growth should mainly come from the construction sector and consumption. Thanks to high wage settlements, private consumption should be again a key growth driver and the expansion of 17 consecutive quarters in a row is likely to continue. (Also included in this issue: lacklustre new construction, lending in Germany, the view from Berlin) [more]

Weaker recent data – too early to throw in the towel, but 2018 GDP forecast cut to 2%. Although German Q1 GDP growth now looks like reaching around ¼% qoq, we still expect some positive payback in Q2, as some temporary factors depressing activity should disappear. Corporate investment spending will be key for growth in the remainder of the year. Unfortunately, signals from proxy indicators have become somewhat mixed recently too. Notwithstanding a likely, albeit limited, Q2 rebound in activity, the strong drop in the expectations' component of the ifo business climate suggests that we have probably passed the peak in qoq growth rates in the current cycle. Due to the weaker Q1 we have lowered our GDP forecast for 2018 from 2.3% to 2.0%. (Also included in this issue: industrial producer and import prices, labour migration, fiscal policy) [more]

In 2017, Germany’s goods exports rose 6.2% in nominal terms, and the trade surplus was the second highest ever. In particular, exports to China and the Netherlands increased considerably. US comments on free trade have caused irritation recently and dampened the outlook for German exports, even though the EU (and, consequently, Germany) have so far been exempted from higher US import tariffs. German capital goods producers and pharmaceuticals companies would be hit hardest by a trade dispute, as the export ratios of these sectors are particularly high. Moreover, the US are an important market for them. (Also included in this issue: rental inflation, fiscal outlook 2018/19, Merkel's fourth legislative period) [more]

Despite the unexpected weakness of domestic demand in H2, sluggish January retail sales and production data and a downshift in industrial surveys in February, we believe that the German economy's boom will continue in 2018, given the elevated levels of these surveys, capacity utilization or order books. The booming economy is reflected in a clear pick-up in agreed pay increases and a strong wage drift. Still, our model shows an only limited pass-through into core inflation, which will rise towards 2%. As the price pressure in volatile components (food, energy) is abating headline inflation will move more or less sideways in 2018/19. [more]

The economy continues to steam ahead, with quarterly GDP growth of 0.5% qoq in the winter half. A tight labour market and swelling order books are boosting the union's bargaining power so they are pushing hard for higher wages, although increases might fall short of expectations among workers and the ECB tower. Meanwhile in Berlin, Groko hopefuls are spending Germany's fiscal surpluses, seemingly unconcerned with demographic challenges and the fact that record low interest rates and above potential growth will not last. This party will likely go on for some time - maybe even a few years. However, the situation feels increasingly reminiscent of carnival revellers' popular song "Am Aschermittwoch ist alles vorbei" (It's all over on Ash Wednesday). [more]

With a growth rate of probably 2.3% in 2017, Germany delivered the main positive surprise in the industrial world. In 2018, German GDP looks set to expand by 2.3% again. If this forecast materialises, Germany will grow at an above-potential rate for the fifth year in a row. The upcoming wage round and resilient demand combined with the global decline in free capacities might, however, push up prices more strongly than currently expected. We already voiced concerns ahead of the Bundestag elections that the new government (just like its predecessor) might not pay sufficient attention to urgent challenges such as digitalisation, demographics and globalisation as the labour market situation is favourable. Now that forming a government has turned out to be unexpectedly difficult our concerns have increased. [more]

Envisaged Jamaica coalition: After the exploratory talks is before the negotiations. It would not come as a surprise, if the coalition formation were to take longer than ever before in the Federal Republic and if the chancellor were not until January. Given that in many areas critical details remained unresolved in the first round of the exploratory talks, further challenging rounds will follow in the next few weeks. Only after that will the official coalition talks begin - provided the Greens sound the all-clear at their party convention. The search for compromises is aggravated, as many of the partners’ requests have to remain unfulfilled despite buoyant tax revenues. Initially, i.e. in 2018, the economic impulse of a "black-yellow-green" fiscal policy is likely to be very limited. But steps in the right direction of strengthening Germany are on the horizon. Another positive is the clear commitment to a united and strong Europe. (Also included in this issue: November tax estimate, German current account surplus, trends in the EU industry) [more]

The view from Berlin: Jamaica unlikely to trigger fundamental policy changes. The total additional fiscal impulse provided by a Jamaica coalition could in our view amount to between EUR 15 bn and EUR 20 bn in 2018. This would be only marginally more than the EUR 15 bn tax cuts "promised" by the outgoing Minister of Finance, which we had already taken into account in our 1.8% GDP forecast for 2018. Proposals in the FDP's election platform to scale back the ESM and to install an orderly EMU exit procedure have raised concerns among some EU politicians. We doubt that these two proposals will make it into the coalition treaty. Despite the FDP's insistence on more market- and rule-based procedure within EMU, it is very unlikely that Germany would not provide the necessary support if another EMU country slipped into acute crisis. (Also included in this issue: Public finances after the election, World trade) [more]