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German Economic Outlook Worses October 2019  The economy was hamstrung in Q2 by the external sector: Exports contracted strongly and do...

German Economic Outlook Worsens (October 2019)



German Economic Outlook Worses October 2019 The economy was hamstrung in Q2 by the external sector: Exports contracted strongly and domestic demand was unable to cushion the downturn. Private consumption growth slowed noticeably and fixed investment contracted. Data for the third quarter, meanwhile, continues to signal diverging trends. Industrial activity remained in a tough spot amid severe weakness in the manufacturing sector. In addition, consumer sentiment averaged lower in Q3 compared to the previous quarter. On the upside, the unemployment rate hit a record low in July, while the services sector expanded robustly in July and August. Against this backdrop, the government unveiled a somewhat looser budget as the fiscal surplus is expected to narrow and announced, on 20 September, a package of stimulus measures to fight climate change; the impact of the latter on the economy should be modest, however. • Economic growth should moderate notably this year, before accelerating slightly next year on rebounding exports. External downside risks, global trade tensions and Brexit, are seen dragging on export demand and the economy at large. However, resilient domestic demand—supported by a tight labor market and loose credit conditions—should buttress economic growth. FocusEconomics Consensus Forecast panelists expect the economy to expand 0.6% in 2019 and 0.9% in 2020, which is down 0.2 percentage points from last month’s forecast.

Harmonized inflation inched down to 1.0% in August from 1.1% in July, owing to cheaper prices for clothing and footwear; accommodation; and transportation offsetting more expensive food and non-alcoholic beverages as well as education. Going forward, inflation should remain subdued on weak economic momentum. Our panelists project average inflation of 1.4% in 2019 and 1.5% in 2020, which is down 0.1 percentage points.

Economy contracts in Q2 as external sector faltersA detailed breakdown of national accounts data saw no revisions to preliminary growth figures. As such, the economy contracted 0.1% on a seasonally and calendar-adjusted quarter-on-quarter basis in Q2, contrasting the 0.4% expansion logged in the first quarter. Meanwhile, on an annual basis, the economy flatlined in Q2 (Q1: +0.8% year-on-year)—marking the first time output has not grown since Q1 2013. A downturn on the external front drove the overall contraction, as the drop in exports outweighed that of imports in the second quarter. In quarter-onquarter terms, exports of goods and services shrank 1.3% in Q2, contrasting a strong 1.8% increase in Q1. Imports of goods and services, meanwhile, fell a relatively modest 0.3% on a quarterly basis in Q2 (Q1: +0.9% quarter-onquarter). As a result, trade subtracted 0.5 percentage points from economic growth in the second quarter, swinging from a 0.5 percentage point contribution in the prior period.

Domestically, dynamics were more upbeat but remained lackluster nonetheless. Private consumption growth stumbled forwards (Q2: +0.1% qoq; Q1: +0.8 qoq), amid deteriorating consumer sentiment and an uptick in the unemployment rate. Furthermore, fixed investment contracted 0.1% quarteron-quarter in Q2 following the robust 1.6% quarter-on-quarter expansion in Q1, due to a considerable downturn in investment activity in the construction sector. That said, government consumption rose 0.5% qoq in Q2 (Q1: +0.8% qoq), which, coupled with a positive contribution from inventories, supported overall domestic demand growth in the second quarter. Looking ahead, most eyes are on the international scene: Ongoing trade conflicts, a disorderly Brexit and an economic slowdown in the Eurozone all threaten to derail the German economic engine further. On top of that, while the second-quarter result suggests that domestic economy continued to perform relatively well, the headwinds at home. As summarized by Carsten Brzeski, chief economist at ING Germany: “On the back of weak confidence indicators, the risk of another contraction of the economy in the third quarter and hence a technical recession has recently increased, not decreased. The resilience of the domestic economy against the industrial slowdown and external woes has only started to weaken since the summer. […] a further escalation of the trade conflict and global uncertainty combined with no fiscal stimulus at all, is currently probably the worst of all nightmares for the German economy.” Calls for increased fiscal stimulus are growing as the Europe’s largest economy is slowing down and faces several downside risks. On 20 September, the government unveiled a EUR 54 billion (approximately 1.5% of GDP) package of green measures for 2020-2023, targeted at fighting climate change. The package still needs to be approved by parliament and includes extra spending and tax breaks. In addition, among the measures are a carbon price and tax incentives for businesses and households to reduce their CO2 emissions. Holger Schmieding, Chief Economist at Berenberg, commentated that “I stick to my earlier estimate that, for the year 2020, the additional fiscal impulse of the two packages combined will be close to €8bn (0.2% of GDP). Unwilling to cut taxes significantly and unable to raise public investment beyond the impressive 10.6% yoy nominal growth rate reached in H1 2019, Germany continues to deliver no more than a slow-motion stimulus. After a fiscal expansion of 0.3%-0.4% of GDP in 2019, we look for an additional fiscal easing of 0.4%-0.5% per year in both 2020 and 2021. It will add up over time and support domestic demand. However, the German stimulus will not be a European let alone a global game changer.” The Central Bank expects economic activity to increase 0.6% in 2019 and 1.6% 2020. FocusEconomics Consensus Forecast panelists foresee economic growth of 0.6%, which is down 0.1 percentage points from last month’s forecast. For 2020, however, the panel expects GDP growth to accelerate to 0.9%, down 0.2 percentage points from last month.

Business confidence slumps to near seven-year low in August, raising concerns of recession
Business sentiment among German firms sank to a near seven-year low in August, with the Ifo business climate index falling to 94.3 points from a revised 95.8 in July (previously reported: 95.7). August’s result marked the fifth consecutive month of tumbling confidence and reflected deepening gloom over the German economy. “There are ever more indications of a recession in Germany. […] Not a single ray of light was to be seen in any of Germany’s key industries”, noted Clemens Fuest, president of the Ifo Institute. August’s result reflected a broad-based deterioration. The all-important manufacturing sector was increasingly pessimistic over the current situation and the expected climate in the months ahead, with confidence hovering at the lowest levels since 2009. Moreover, overall sentiment within the trade sector slipped into negative territory, while confidence in the services sector fell sharply in August—chiefly due to a less favorable assessment of the current climate—although remained positive nonetheless. Similarly, despite falling mildly due to a less positive assessment of the current situation, overall sentiment in the construction sector remained firmly in positive territory.

All in all, Eurozone’s largest economy is suffering from the effects of rising external headwinds, chiefly due to its significant exposure to escalating global trade conflicts and Brexit-related uncertainty. The downturn in the German manufacturing sector appears to be spreading to the wider economy, with domestic demand, which has been solid to date, seemingly losing momentum, and thus raising calls for government stimulus. Looking ahead, the chief economist of ING Germany, Carsten Brzeski, noted that: “The German manufacturing sector still seems to be in free fall. At least in the short run, there is very little hope for a rebound. […] the manufacturing downturn and never-ending external woes have started to bruise the domestic economy. […] The more and harder the domestic economy will be hit by the current slowdown, the higher the likelihood of a significant fiscal package”


From Focus Economic, Major Economies Economic Outlook, October 2019