Playing in a league of its own

Today’s first estimate of German GDP growth in the second quarter confirmed an excellent growth performance. According to the first estimate by the German agency for statistics, the German economy grew by an impressive 2.2% QoQ in Q2 2010. This is the strongest quarterly reading since German reunification. Compared with Q2 2009, German GDP increased by 3.7%. The decomposition of the GDP numbers will only be published in two weeks but recent monthly data indicate that growth was driven by exports and investments, while the drop in private consumption should at least have come to an end. In addition, the numbers for the first quarter of 2010 were revised upwards to 0.5% QoQ, from 0.2%.

The strong Q2 performance of the German economy is impressive but not surprising. Structurally in a much better shape than many other industrialized countries, it was just a matter of time before the German economy would pick up further speed. In the second quarter, the German economy mainly benefitted from two factors: a catching up in the construction sector after the harsh winter and strong foreign demand for German goods.

Looking ahead, it is almost needless to say that the current growth momentum is hardly sustainable in the coming months. With the one-off impact from the construction sector and normalizing of export growth, German growth will return to more ordinary growth numbers. Nevertheless, despite an inevitable slowdown, all ingredients are there for the German economy to take the next step towards a self-sustained recovery. Confidence indicators are still at high levels, order books are amply filled and German job miracle is continuing. With more and more people returning from short-work schemes to full time schemes to work off increasing backlogs, some minor employment growth should not be excluded, further improving private consumption.

Today’s numbers are an impressive reminder that the German economy is currently playing in a league of its own. However, watch out not to get carried away by blind cheer. As much as the Q1 GDP numbers underestimated the real strength of the economy are Q2 numbers now overestimating it. As so often, the truth lies somewhere in-between. With some slowing down in the coming quarters, the German economy will rejoin the league of the other Eurozone countries. Nevertheless, the German economy should remain the top attraction of the Eurozone league for some time.