Wednesday, February 24, 2010

German recovery takes a break

Today’s second estimate of the German statistical office confirmed what we already knew: the recovery took a break in the fourth quarter. After two quarters with solid growth, German GDP stagnated in Q4 2009. The YoY decline of 1.7% illustrates that the economy has left the worst behind.

The decomposition of the decline reveals interesting details. Consumption life after the car scrap scheme does not exist. Private consumption dropped by a dramatic 1.0% QoQ, returning private consumption to the level of early 2007. Capital investment and, very surprisingly, government spending also dropped significantly. Only exports continued their strong upward trend, increasing by 3.0% QoQ. Rebalancing the German economy towards more domestic demand looks differently.

At first sight, it looks as if the German economy has fallen into hibernation: stagnating growth in the fourth quarter and yesterday's weakening Ifo index. However, looks can be deceiving. The underlying trend remains healthy. Demand for German products remains strong and German companies are increasingly becoming more positive about the future.

Looking ahead, the harsh winter weather will determine the near term outlook for the German economy as it weighs on production, construction and the implementation of the government's stimulus for infrastructure investment. However, the snow will only delay but not stop the recovery. The hibernation should be short.

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