Germany's Q3 GDP data reveal strong consumption offset to negative net exports and renewed slide in investment

Component data now released for the third quarter of 2015 confirm – as shown by "flash" data released by the Federal Statistics Office (FSO) on 13 November – that German real GDP increased 0.32% quarter-on-quarter (q/q), which is only slightly weaker than the average pace of 0.37% q/q during the eight preceding quarters. The third-quarter expenditure breakdown reveals that private (and even more so public) consumption growth (re-)gained considerable momentum, whereas fixed investment slipped slightly once more and net exports subtracted 0.4 percentage points from quarterly GDP growth, reversing second-quarter developments. Overall domestic demand growth rebounded sharply from -0.2% q/q in the second quarter to 0.7% q/q in the third, which was also helped by inventories switching from being a net burden to providing 0.2 percentage points to quarterly GDP growth. The negative impact on GDP from net exports occurred despite export growth remaining slightly positive, as imports grew at a much faster pace. Domestic demand added 0.7% to GDP growth, quickly recovering from the -0.2% performance in the previous quarter and returning to the average pace observed during the fourth quarter 2014 (0.9%) and first quarter 2015 (0.5%). Even if inventory changes are excluded, the GDP growth contribution of final domestic demand has rebounded from 0.1% in the second quarter to 0.5% in the third. Nevertheless, this falls short of the pace of 0.9% in the fourth quarter of 2014 and 0.6% in the first quarter. Unadjusted for calendar factors, the year-on-year (y/y) rate of overall GDP growth has increased further from 1.6% to 1.8%, and the seasonally and calendar-adjusted series has similarly shown a rise from 1.6% to 1.7%. This has occurred despite the construction sector still failing to rebound from weakness in the second quarter, which reflected the boost to building activity in the first quarter from unusually mild winter weather. Broadly speaking, underlying annualised GDP growth momentum in the German economy is currently around 2%.

Looking at developments of the individual components in the third quarter, the breakdown reveals net exports subtracted 0.4 percentage points from quarterly GDP growth, having added 0.6 points in the second quarter while weighing on GDP in the fourth quarter of 2014 (0.3 points) and in the first quarter this year (0.2 points). At the same time, domestic demand net of inventories added 0.5 points, recovering from only 0.1 point in the second quarter. A fresh build-up of the stock of inventories boosted GDP growth by 0.2 percentage points, having subtracted about the same amount on average during the first two quarters of 2015. Indeed, declining stocks had subtracted a cumulative 1.2% from GDP growth during the four quarters between mid-2014 and mid-2015, so that the latest development tentatively signals a reversal. Among the components of final domestic demand, private and public consumption contributed 0.3 and 0.2 percentage points, respectively, to quarterly GDP growth in the third quarter, while fixed investment subtracted 0.1 point. The breakdown for fixed investment shows that this was largely due to investment in equipment, although construction investment also weakened slightly.

Net exports burdened GDP growth in Q3 as imports outpaced exports

The negative growth contribution of -0.4% from external demand was the result of only slight growth in exports of goods and services, at 0.2% q/q, being dwarfed by strengthening import growth at 1.1% q/q. This contrasts with the positive contribution of net exports during the second quarter, when outperforming exports added 0.6% to quarterly GDP growth, but it represents a return to the pattern of faster import than export growth prevailing in the two quarters straddling the turn of the year 2014/15. Looking at the average of the last five quarters since mid-2014, export and import growth both now reveal an average growth pace of 1.3% q/q (about 5% annualised). Overall, recent German export performance remains encouraging against the background of escalating geopolitical crises (Ukraine, Iraq/Syria) and worsening problems in several key emerging markets during the past 15-18 months. The export orders component of Germany's PMI survey has on average been hovering slightly above the neutral level of 50 since mid-2014, showing a modest improvement to around 52 during the August–November 2015 period. One factor helping to explain this is the solid economic recovery in the US and the UK, whereas lag effects mean that the weakening euro since mid-2014 has only boosted exports more strongly in recent months – more of which will be seen in early 2016 as the further softening of the euro since mid-October leaves its mark. Imports have increasingly reflected the acceleration in domestic demand that has developed since mid-2014, the relative setback in the second quarter proving only short-lived. Improving demand for intermediate goods imported from abroad, as required by Germany's export sector, is having the usual supportive effect.

Increasing inventories augment rebound in final domestic demand

Private consumption at 0.6% q/q broadly returned to the robust growth pace observed between mid-2014 and the first quarter of 2015. Anything else would have been a major surprise in view of the persisting extremely supportive domestic environment for consumer spending, including a healthy labour market and wage developments alongside softening oil and food prices, which have boosted purchasing power. Furthermore, the ECB's policy of quantitative easing that started in March has helped to reduce interest rates to record lows, providing a major disincentive to save.

Government consumption growth even accelerated to 1.3% q/q, following an upwardly revised pace of 0.7% in the second quarter and a 0.5% average during the seven prior quarters. This apparently now finally reflects the loosening of German fiscal policy in the wake of the grand coalition government coming to power in late 2013, with the expanding inflow of migrants since mid-2015 likely also playing a role at the data edge. Strong tax revenues are providing the fiscal leeway for this increase in government spending, as the public sector can still maintain a balanced budget or even a small surplus during 2015–16.

By contrast, fixed investment declined -0.3% q/q, similar to the slippage of -0.4% q/q in the previous quarter and unlike the interim rebound at an average pace of 1.5% q/q during the two quarters straddling the turn of the year 2014/15. This is a similar development to what had happened exactly one year earlier – the second quarter of the year suffered from a recoil effect of a weather-induced spike in construction investment in the first quarter and then failed to recover right away due to major political uncertainties (in the third quarter of 2014 related to Ukraine, in the third quarter of 2015 reflecting the culmination of the Greek debt crisis). The split between the two major components of fixed investment shows that equipment investment was the weaker element this time, deteriorating from average growth of 1.7% q/q during the three previous quarters to -0.8% q/q in the third quarter. Construction investment – which constitutes about 50% of overall fixed investment versus just 32% for investment in equipment – slipped -0.3% q/q, and thus to a lesser extent than in the second quarter (-1.3% q/q).

Leading indicator evidence from the construction sub-index of the Ifo business climate survey in recent months signals that a renewed rebound will be seen in the fourth quarter. Note too that gross overall investment, i.e. including also inventories, revealed a switch from a marked decline of -2.1% q/q to an increase of 0.6% q/q, reflecting the above-mentioned impact of a fresh increase in stocks. It appears that the resolution – for the time being at least – of the Greek crisis in late July has at least helped inventories, whereas the reduction in uncertainty takes longer to translate into higher actual investment in new equipment.

Outlook and implications

The latest indications gleaned from key leading indicators have been positive. Thus purchasing manager (PMI), Ifo business climate, and – as of November – ZEW data have all turned higher again of late. Overall, Germany's recovery remains well underpinned, helped by the significant declines of oil prices and the euro since mid-2014. Consumer purchasing power and German external price competitiveness are thus very supportive. The ECB's quantitative easing policy (likely to be expanded even further in December), a comfortable German budgetary situation, and less austere fiscal policy in many troubled Eurozone countries than during 2012–13, and thus improving aggregate demand in the Eurozone at large, are additional helpful factors. Even the migrant crisis represents a near-term boost to the German economy as related additional spending by the public sector is not being offset by reduced expenditures elsewhere. Private consumption is being strengthened by ongoing robust increases in disposable income, near-zero inflation, and very supportive labour market conditions. In addition, residential construction enjoys an ongoing upward trend due to extremely favourable financing conditions and a lot of structural demand, not least also due to unexpectedly large increases in immigration during the last two-to-three years and especially now in recent months. All these factors compensate for the dampening effect of weaker demand from emerging markets (including China).

Overall, IHS Global Insight has projected in its November forecast round that calendar-adjusted year-average German GDP growth, following 1.6% in 2014, will show 1.5% in 2015 and acceleration to 2.0% in 2016 and also 2017. This outlook can be maintained despite the new factor of uncertainty related to increasing acts of terrorism. Investment growth should increasingly recover during the coming months from the setback of the two latest quarters, as required due to strong private and public consumption. The latter is also linked to the need for additional infrastructure and housing investment due to the large influx of migrants. Quarterly GDP growth should thus maintain a pace of around 0.5% q/q during the coming quarters, implying an annual growth pace near 2%. Indeed, given positive calendar effect this year and next, IHS expects unadjusted GDP growth (as also used for official government forecasts) at 1.8% in 2015 and 2.1% in 2016.