Germany avoids recession

Germany has staved off recession thanks to growth in consumer spending. The most we can say, however, is that the German economy is stabilising. There are no signs yet of sustained improvement. So what is in store next for the German economy?

The pace of economic growth in Germany picked up again slightly in the third quarter of the year (up by 0.1 per cent), following a decline in economic output in the second quarter (down by 0.2 per cent). Germany has therefore avoided a recession. The positive sign next to the growth rate came as a surprise to economists. Most had been expecting economic output to drop by 0.1 per cent, which would have represented a technical recession (two consecutive quarters of negative growth). So does this mark the end of Germany’s economic downtrend?

Germany: technical recession has been avoided 

GDP growth vs previous quarter
Germany: technical recession has been avoided 
Source: Bloomberg; as at 15 November 2019.

Consumer spending shoring up growth in Germany

Most of the positive momentum in the third quarter came from consumer spending. Household expenditure was higher than in the second quarter, and the government also ramped up its spending. Exports rose too, but imports stayed at around the same level as in the second quarter. More was invested in construction, but capital spending on plant and equipment fell.

The net effect was that Germany unexpectedly staved off recession. Some leading economic indicators have also shown an improvement in recent weeks. New manufacturing orders, for example, were up by a surprisingly sharp 1.3 per cent in September in comparison with the previous month. In addition, the industrial purchasing managers’ index for Germany rose from its lowest level for ten years (41.7 points) to 42.1 points in October. However, this is still well below the threshold of 50 points that signals expansion. Developments in Brexit and the trade dispute also gave cause for optimism. In the UK, the risk of a no-deal Brexit has subsided and there has been a rapprochement between the US and China in the trade Dispute.

Weakness in German industry still not overcome

German industrial purchasing managers' index
Weakness in Germany
Sources: Macrobond, Markit; as at 15 November 2019.

A resolution in the trade dispute and an orderly Brexit would have a positive impact on the German economy. But so far we have only seen progress made on both fronts – no actual breakthroughs. Union Investment’s economists also believe that the leading indicators are, at best, hinting at stabilisation. Even though Germany hasn’t technically slipped into recession, the economic situation there remains weak. The German economy is heavily reliant on exports, which is why it is suffering so badly from the slowdown in global trade caused by the trade dispute. Subdued growth in China is also taking its toll on German industry.

Germany is lagging behind most other European countries at the moment. In the third quarter of 2019, the economies of the 28 member states of the European Union expanded by 0.3 per cent compared with the previous quarter; growth in the eurozone stood at 0.2 per cent.

Weakness in industry holding back job market

The economists at Union Investment believe that the slowdown in industry will gradually make its presence felt in what has been a strong labour market up to now. Consumer spending would then probably weaken too. Domestic demand, which is still at quite a robust level, is therefore likely to drop off in the months ahead. This would have an adverse impact on growth in 2020.

The growing willingness of the German government to ramp up state expenditure should go at least some way to compensating for this. Despite the limits imposed as a result of the ‘debt brake’, government spending is expected to increase by an amount equivalent to roughly 0.5 per cent of GDP in 2020. This probably won’t be enough to reverse the weakening of industry, but it should significantly mitigate it. Construction activity is likely to remain very robust – driven by demand resulting from the expansionary monetary policy in the eurozone. The forecast for GDP growth in Germany for 2019 as a whole is 0.5 per cent (2018: 1.5 per cent), according to Union Investment’s economists. In 2020, GDP growth could reach 0.6 per cent. The outlook for the eurozone as a bloc is slightly better but still not particularly rosy. The prediction of UI’s experts is that its GDP will grow by 0.8 per cent in 2020.

Economic growth to remain weak in 2020

Union Investment's GDP growth forecasts
Economic Growth
Source: Union Investment; as at 15 November 2019

So despite Germany having staved off recession and certain leading indicators edging up, there are no signs of a sustained improvement in its economic situation. Further stabilisation is the most that can be expected. This is because the causes of weak growth, which include the trade dispute and Brexit, will continue to cloud the economic climate going into 2020. If these downside factors are resolved, however, the picture is likely to brighten somewhat.

 

Unless otherwise noted, all information and illustrations are as at 15 November 2019