Germany: The Black Eye Just Got Blacker

The year 2018, which started off with expectations of the best growth performance since 2011, ended with a big stinker.

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According to the first official estimate of fourth-quarter GDP growth, the German economy just narrowly escaped a technical recession. GDP growth came in at zero, from -0.2% QoQ in 3Q. Year-on-year, GDP growth came in at 0.9% and 0.6% when adjusted for seasonal effects and working days. The growth composition will only be released at the end of the month but according to available monthly data and the statistical agency’s press release, investments, private and public consumption were the main growth drivers, while net exports remained flat.

The weak performance of the German economy in the second half of the year is the result of (too many) one-offs, surfacing structural weaknesses and external uncertainties. Just think of cars, low water levels in main rivers, the trade conflict between the US and China, Brexit or the lack of investment in digital and traditional infrastructure, delays of railways and airlines as well as hardly any significant new structural reforms in the last ten years. What a list! However, it is still not necessarily the end of a long positive cycle.

Not losing our optimism

Looking ahead, there are still plenty of reasons to remain optimistic. Not only were there some encouraging data signals under the surface of recent macro data, there are also fundamental reasons to remain optimistic: the labor market is strong, consumers’ willingness to spend at its highest level since April last year, order books are still richly filled and companies still report assured production close to record highs. While capacity utilization has dropped to its lowest level since the third quarter of 2017, the lack of equipment still is a more limiting factor to production than the lack of skilled workers. In addition to this, the recent pick-up in orders in the automotive industry and favorable financing conditions in the entire economy also bode well for at least solid industrial and investment activity in 2019. Add to this the positive fiscal stimulus provided by the government and there is a good counterweight to the latest drop in sentiment.

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