Most indicators for November surprised on the upside. Despite a string of disappointing data, in particular from the manufacturing sector, GDP actually increased in Q3 by a meagre 0.1%, whereas the consensus had expected a further shrinkage (-0.1%). The main reason was robust growth of private consumption, underpinned strong household confidence levels. GfK indicate that household confidence has remained also very strong in Q4. Also net exports contributed positively to growth, as world trade bounced back. Nevertheless, industrial production remained very weak and the strong rebound in orders in September was the only positive surprise for manufacturers.
After months of negative surprises, some indicators of the Pulse have migrated to the right hand side of the chart. In particular, the ifo business climate index stabilised in October, whereas the market had expected a further decline. Both ifo and pmi surveys signal a slight improvement in sentiment in manufacturing, although the indices remained deep in contraction territory. This is also confirmed by the continuing weakness of orders in August. Hence, the slight pick-up of industrial activity in that month was probably a statistical blip. The main risk for the economy is that the negative news feed from the export-oriented manufacturing sector is spreading to the domestic economy
Weak data and business cycle indicators suggest that German economy would be in a mild technical recession. The weakness is mainly in the manufacturing sector and has hardly affected the rest of the economy. Despite calls from different quarters, the government is unlikely to launch a fiscal stimulus, beyond what is in the coalition agreement and the climate package. Simulations show that spill-over effects of a fiscal boost to other countries will be limited. Moreover, the implementation might be hampered because of long planning periods and bottlenecks in the labour market. Political tensions could increase after the SPD congress in December.
Germany is probably in a technical recession and recent data do not point to any improvement in the near term, quite to the contrary. Given the country’s considerable budget surplus, German business leaders are calling for fiscal stimulus. This echoes Mario Draghi’s plea in favour of budgetary expansion in countries with fiscal space. Simulations show that spillover effects to other eurozone countries would be small. Moreover, the implementation of a fiscal package requires long preparation and may be hampered by labour shortages.
Business cycle indicators mostly disappointed during the summer months and ended up below the already subdued expectations. In July, both industrial production and orders fell sharply. This could be partly attributed to the early start of the summer holidays. In that case, an opposite effect can be expected in August. More worrying was the more-than-expected decline of the IFO climate index in August, as business conditions in trade and services fell sharply. It is a sign that the deterioration of the business climate is not anymore confined to only manufacturing, something which has been emphasized by the Bundesbank. But this was contradicted in early September by the PMI composite. The indicator was actually stronger than expected, as services growth remained solid.
As international trade slows, the economy is mainly supported by expansionary fiscal and monetary policies and real disposable income growth. After a mild contracted in Q2, the economy is expected to grow modestly in the second half of the year. In 2020, exports may strengthen again and growth could return to close to potential. Due to its deep integration in global value chains, Germany is relatively hard hit by the global trade slowdown. This integration has undoubtedly brought benefits by improving productivity and skill-intensity. However, it has also accentuated income inequality.
Today’s Pulse for Germany suggests that the economy is doing even less well than the already diminishing expectations. But on closer inspection, it does not look half so bad.
Over the past few months, the news flow for the German economy has definitely improved. Manufacturing output strengthened for the second consecutive month, although remaining well below last year’s level. Also industrial orders rose slightly, although falling short of market expectations. Even though consumer confidence slightly weakened April, it remained at a very high level.
Since the middle of 2018, economic activity has virtually stagnated largely because of a slowdown in world trade. The most recent surveys and hard data confirm that weakness in the manufacturing sector continued in Q1 2019. Spearhead of the economy, the sector can become a source of vulnerability when world markets are less buoyant. However, Germany is able to support domestic demand. In 2019, the government will return to households and businesses a part of last year’s record budget surplus (more than EUR 50 bn).
The German economic sky seems brightening up as the Pulse indicators are moving towards the northwest quadrant of the chart. However, for the moment, the improvement is largely located outside the country’s large manufacturing sector.
GDP has been stagnant since the mid-2018, largely because of the falling industrial activity. In March, the manufacturing PMI reached 44.1, pointing to the sharpest contraction in output since mid-2012. However, the tide could be changing. For example, the IFO business climate indicator strengthened in March, following six consecutive months of decline. Nevertheless, confidence in the manufacturing sector remained on a downward trajectory. Industrial orders started the year rather weak, as they came in 3.6% lower in January than in previous month. Nonetheless, they were at about the same level as during the preceding six-month period. Based on past experiences, this stabilisation could announce an imminent turning of the cycle
Negative surprises were in abundance in industry in February. Contrary to expectations, industrial production weakened further in December due to a sharp decline in construction activity. The only hopeful sign was the strong rebound in the car industry (+7%). The forward-looking indicators also surprised on the downside.
In recent years, Germany has posted substantial current account surpluses, well above the level justified by economic fundamentals. This can be attributed to a substantial increase in savings of the government and the corporate sector. Many observers consider Germany’s current account surplus as a threat to the eurozone economy and urge the German authorities to reduce it by boosting wages and investing in infrastructure. These demands have largely been ignored. Supported by model simulations, the German authorities argue that these measures would be detrimental to the German economy, while having hardly any effect on the other eurozone countries. They call for more structural reforms in the European Union, such as a further opening of the services sector.
Economic growth has slowed markedly since the second quarter of 2018 and business surveys indicate that it is unlikely to change in the coming months. The exporting manufacturing sector is much affected by the slowdown in world trade. In the coming quarters, the domestic economy is likely to become the major engine behind growth thanks to an expansionary fiscal policy. More fiscal stimulus could be expected if the economy would slow further. This would also shore up the chances of the coalition parties at the next federal election set for 2021.
For Germany, 2019 started with a hangover. Most indicators that we follow are below their long-term average and all surprised on the downside. In particular, the export-oriented manufacturing sector has been badly affected.
The Federal Republic of Germany is a parliamentary republic headed by a chancellor and a president. It comprises sixteen states (Bundesländer). Each state has its own state constitution, and is largely autonomous concerning its internal organisation. The most prosperous states are Bayern and Baden Württemberg in the southern part of the country. GDP per capita in these states are about 15% higher than the German average. The dynamism of the area is largely due to its sector specialisation. Manufacturing production makes up around 30% of production, and is concentrated in hi-tech industries.
With 83 million inhabitants the Federal Republic of Germany is the leading economy in the Eurozone both in population terms and its share of Eurozone GDP (more than one third). GDP per head is 20% above the Eurozone average, making it one of the most prosperous Eurozone countries. Germany is the world’s fourth largest economic power after the US, Japan and China, and the third largest exporter after China and the US.
The manufacturing sector plays a vital role in the economy. It accounts for almost 20% of employment and contributes almost a quarter of total value added. However, industry’s central role makes Germany’s economy more cyclical than some of its neighbours