The last sign of crisis resistance. According to the first estimate of the German statistical agency, the Eurozone’s largest economy enjoyed an impressive comeback in the third quarter, growing by 0.5% QoQ. At the same time, 2Q growth was revised upwards to 0.3% QoQ, from 0.1% QoQ. Compared with 3Q10, the German economy grew by 2.6%. GDP details will only be published with the second estimate, but available monthly indicators point to widely spread growth in the third quarter. The months July and August were simply too strong to have disappointing September numbers spoil the growth party.
With today’s numbers, an annual growth rate of 3% for the entire year 2011 is still possible. Of course, third quarter numbers come after an exceptionally weak second quarter, in which the shutdown of eight nuclear power plants had probably shaved off some 0.3 percentage points from the quarterly growth rate. Nevertheless, even if strong 3Q growth is partly driven by a technical rebound, it also reflects the solid fundamentals of the German economy.
Looking ahead, sentiment indicators point to a significant growth slowdown, a contraction of the economy towards the end of the year is possible. The reason for this slowdown is the sovereign debt crisis. For a long while, the German economy has been one of the few beneficiaries of the sovereign debt crisis. A weaker euro, very accommodative monetary policy and low funding costs have contributed to strong and solid economic growth. With the latest stage of the debt crisis and France and Italy seemingly drowning in the maelstrom of the debt crisis, the German economy has lost its immunity. Austerity measures in France and Italy will also hurt German exporters.
Nevertheless, the German should not fall off a cliff as it did in 2008. The economic fundamentals are solid and the combination of low inventories and high backlogs should put a safety net under the economy. Moreover, there is a final trump card. Flight-to-quality in bond markets is still spoiling the German government with unexpected revenues. According to our own estimates, this flight-to-quality impact on German yields enabled the German government to save almost 9bn euro on its bond issuances of these two years. Interestingly, this is already more than the recently announced tax relief for 2013 and 2014.
With today’s numbers, the German economy has returned as the economic powerhouse of the Eurozone. Even if in the current circumstances skeptics could be tempted to call it one-eyed among the blind. Either way, one thing is clear: with the latest stage of the sovereign debt crisis, today’s numbers are as good as it gets for the German economy. At least for a short while.