Four quarters of growth in a row, and almost everyone wonders ‘why’. Like Hertha Berlin football club, the German economy is on an unexpected winning streak, but that doesn’t guarantee a lasting comeback.
The German economy continues its recent upswing and is on its longest growth streak since the end of the pandemic lockdowns. GDP grew by 0.2% quarter-on-quarter in the third quarter, from 0.3% QoQ and by 1.2% year-on-year – the fourth consecutive quarter of growth. Details will be released in a few weeks, but the available monthly data and the statistical office's press release suggest that growth was driven by private consumption, while exports and investments weakened.
On track for the best year since 2022
So far, the German economy has weathered the energy price shock better than feared. Three factors explain why: one-offs, inventories and fiscal stimulus.
The most important one-off is that other regions were hit harder by the closure of the Strait of Hormuz. Industrial orders shifted mainly from Asia to Europe, turning some German companies into unlikely crisis beneficiaries. That's a windfall, not a comeback in competitiveness.
Second, monthly indicators point to inventory build-up in recent months. Whether that's good or bad news depends on the motive. If companies are restocking because they expect more orders, it's a prelude to higher production. If they are simply hoarding inputs out of fear of further disruption, it's borrowed growth that will be paid back once stocks are run down. The jury is still out.
Third, the large fiscal stimulus – investment in defence and infrastructure – is gradually reaching the economy. Parts of it are still seeping away in the morass of bureaucracy and regulation, but the first growth effects are visible.
A rebound is not yet a recovery
Looking ahead, the outlook remains highly conditional on the fiscal stimulus and the speed and degree at which it feeds through to the entire economy. That's the cyclical story. The structural one hasn't changed: to turn this rebound into a sustainable recovery, Germany still urgently needs reforms to restore international competitiveness.
And the risks are hard to miss, both cyclically and structurally. The war in the Middle East could escalate further, possibly after next week's US mid-term elections, keeping oil prices elevated or pushing them even higher. Higher gas prices are likely to bite during the current heating season. Low water on the main waterways remains a threat to industrial supply chains and production. And the surge in interest rates will take its toll on housing and broader investment. Last but not least, let's not forget that German industry is still in the midst of a long transition; the China shock hasn't vanished into thin air after a few quarters of growth.
Top of the table, for now
Still, the German economy is on track for its best growth performance since 2022. Some would say there's life in the old dog yet. I call it the Herthafication of the German economy. Hertha, what? Hertha Berlin, my favourite football club, plays in the second division and is a unique blend of outrageous ambition, mismanagement and sometimes plain bad luck. Written off by every pundit before the season started, it has won seven of its first eight matches, sits top of the table, and almost everyone wonders ‘why’.
As with the German economy, there are reasons for the current upswing. However, as much as every Hertha fan knows that leading after eight match days is no guarantee for promotion, every economist knows that a few quarters of a rebound do not automatically make a sustainable recovery.
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