The German growth outlook remains positive despite only modest momentum in late 2015.
IHS perspective | |
Significance | German GDP growth of 0.3% quarter on quarter (q/q) in the fourth quarter of 2015 was on the weak side of expectations owing to a surprising lack of momentum for private consumption. Net export weakness and government consumption strength were as expected, whereas investment was a pleasant surprise. |
Implications | With investment picking up and private consumption likely to accelerate again at present, headline GDP growth in the first quarter of 2016 should pick up to at least 0.5% q/q. The extent of export damage related to emerging-market woes is being overstated by the media. |
Outlook | In its forthcoming February forecast round, IHS will reduce January's forecast of 2.0% real GDP growth for 2016 to 1.9%. The expectation for underlying annual growth momentum around 2% remains intact. |
Headline Q4 GDP growth of 0.3% q/q understates underlying momentum
Based on "flash" data released by the Federal Statistical Office (FSO), German real GDP increased by 0.3% quarter on quarter (q/q) during the fourth quarter of 2015, failing to show the hoped-for acceleration from growth of 0.3% q/q in the third quarter and 0.4% q/q in each of the two initial quarters of 2015. An encouraging increase in investment (most notably construction) and a refugee-related pick-up in public consumption only sufficed to compensate for a negative growth contribution from net exports and only weak expansion of private consumption. Based on the calendar and seasonally adjusted series, the year-on-year (y/y) rate of growth softened from a six-quarter peak of 1.7% in the third quarter to 1.3% in the fourth quarter of 2015. Unadjusted for working-day discrepancies, however, y/y growth actually strengthened from 1.7% in the third quarter to 2.1% in the fourth, reflecting two extra working days. Meanwhile, calendar-adjusted growth in 2015 overall has been revised down from an originally released 1.5% (14 January) to 1.4%, although rounding overstates matters. IHS's forecast for 2016 will be reduced slightly from 2.0% to 1.9%, which translates into 2.0% unadjusted for working-day effects (up from 1.6% in 2014 and 1.7% in 2015).
Today's flash release for the fourth quarter as usual encompasses only data for the overall GDP aggregate and not the individual components. The latter will only be made available on 23 February. The FSO as the releasing agency has nonetheless provided some important guidance in qualitative form. Domestic demand remained broadly as robust as in the preceding quarter, in this case driven by public consumption and rebounding fixed investment. The former can be attributed to rising expenditures for refugees, while investment was mostly boosted by construction in the final quarter of 2015 as demand for housing is increasing for both domestic reasons and as a result of the migrant influx. Investment in equipment also expanded (unlike in the third quarter), but apparently with much less momentum than construction. The environment of record-low interest rates and pent-up investment needs in the areas of housing and infrastructure is helping, whereas ongoing high levels of geopolitical uncertainty (Middle East turmoil, Ukraine, Greece, refugees) and emerging-market woes act as a restraint on firms' investment plans. Meanwhile, private consumption also grew in the fourth quarter but seemingly at a slower pace than in the third quarter, which is somewhat disappointing in view of the persistently favourable background of good labour market conditions and softening inflation.
Net exports again weigh down moderately on GDP growth
External demand had a net dampening effect on German GDP growth in the fourth quarter that was of a similar magnitude as in the third quarter, therefore around 0.3–0.4 percentage point. The difference with the previous quarter is that both exports and imports declined in the fourth quarter, whereas they had still grown in the third. Thus imports did not shrink as much as exports in the final quarter of 2015. Exports had previously shown positive growth for 11 consecutive quarters. In the fourth quarter, a still improving Eurozone economy and robust growth in the US and the UK were no longer sufficient to offset worsening economic conditions in many emerging markets (importantly including China). By contrast, robust German domestic demand is continuing to give its trading partners in the Eurozone fresh impulses via German imports. Monthly customs trade numbers have already been displaying stronger import growth than export growth in all months but one since June 2015.
Nevertheless, improving economic conditions in the Eurozone and the ongoing weak stance of the euro will prevent any significant decline in exports, which should actually strengthen modestly again during 2016. This holds true despite global trade growth remaining relatively weak because of emerging-market problems. Indeed, the purchasing managers' index (PMI) sub-index for export orders had shown a fairly significant gain during November/December 2015 before correcting again in January, which on balance still argues for a modest export rebound in the first quarter of 2016. Imports will continue to be boosted by robust domestic demand, thus ensuring that net exports will still rather be a burden on GDP growth during the first half of 2016.
Domestic demand broadly maintains momentum despite shift among components
Based on the initial indications provided with the flash data, private consumption growth seems to have weakened in the fourth quarter compared with the previous quarter, whereas investment seemingly rebounded. Public consumption broadly repeated the previous quarter's strong performance, much of which was linked to refugee-related expenditures.
The FSO has spoken of a "light" increase in private consumption, which indicates weaker growth than the pace of 0.6% q/q seen in the third quarter. This is somewhat surprising in view of unchanged favourable conditions such as improving labour market conditions, rising purchasing power due to fresh oil price declines, and some fiscal loosening in recent times. This suggests that there is some pent-up consumer demand that should be reflected in the forthcoming first-quarter 2016 data.
Public consumption growth should have been as strong as in the third quarter (then 1.3% q/q) or even stronger, owing to sharply rising expenditures for refugees but also for infrastructure investment. Public budgets have been loosened as existing surpluses are being used not to pay off old debt as originally planned, but to boost spending instead. We estimate that at least half of the boosting impact of 0.2–0.3 percentage point on GDP growth in is the fourth quarter was related to the migrant influx.
Fixed investment performed better than expected, unwinding the previous quarter's disappointing development. Investment in construction in particular apparently rebounded markedly, with most impulses likely to have stemmed from the housing sector. Underlying conditions remain very favourable for the building sector, given record-low interest rates, the surge in demand linked to the huge influx of refugees, and consumers' desire to safeguard the value of their assets in uncertain times. Encouragingly, investment in equipment also rebounded after a dip in the third quarter, although the dampening influence of emerging-market woes and geopolitical uncertainty on Germany's manufacturing sector is limiting the momentum of this recovery.
Outlook and implications
Overall, the fourth-quarter GDP data underline an ongoing dichotomy between fairly weak external demand and persistently robust domestic demand. As the main reason for the somewhat disappointing overall performance in the fourth quarter of 2015 was that private consumption growth was weaker than expected (the other components of demand all behaved more or less as expected), there is potential for acceleration in GDP growth in the first quarter of 2016. Factors that influence private consumption – labour market developments, real income, the propensity to save in low-interest times – have all remained very favourable to date, arguing for a bounce-back in consumer demand. Furthermore, the relative performance of exports compared with imports should move somewhat in the former's favour, thus reducing the external burden on GDP growth. Finally, orders for investment in equipment stabilised in late 2015 and building sector activity is expected to receive ongoing impulses from demographic influences. The underlying annual growth pace should therefore be close to 2% in the quarters ahead, notwithstanding December/January downward corrections for the manufacturing PMI and Ifo leading indicators. Economic growth will derive ongoing support from low oil prices, a weak euro, persistently soft or even softer monetary policy from the European Central Bank, more public spending on refugees and infrastructure, an improving overall Eurozone environment, and a solid US recovery. Uncertainty linked to various geopolitical risks will be a restraining factor, especially for exports and investment in equipment. Net exports are increasingly shaping up to be a net burden for GDP growth in 2016, although it is worth keeping in mind that the existing large gap between (higher) export levels and import levels necessitates much higher import than export growth in order to lead to a diminishing trade surplus and thus weigh down on GDP growth.
The softer-than-expected fourth-quarter GDP data, in combination with slight downward revisions to the second- and third-quarter 2015 data, force IHS to reduce its forecast for German real GDP growth in 2016 from 2.0% to 1.9%. Given a calendar effect of 0.1%, the unadjusted number as used by the German government in its projections is therefore being lowered by IHS from 2.1% to 2.0%. This still exceeds the German government's latest official forecast of 1.7% as we remain more optimistic with respect to private consumption dynamics and export resilience.