Wednesday, February 15, 2012

German economy takes a growth pause

Growth pause. As expected, the German economy contracted for the first time since the end of the recession in 4Q 2011. According to a first estimate, the Eurozone’s biggest economy shrank by 0.2% QoQ. Compared with 4Q 2010, this is still an increase of 2.0%. At the same time, 3Q growth was revised upwards to 0.6% QoQ, from 0.5% QoQ. Despite a disappointing fourth quarter, the year 2011 was one of best years in terms of GDP growth for the German economy.

The decomposition of growth will only be released at the end of the month but according to the press statement of the German statistical office and available monthly data, only investment and the construction sector should have grown in 4Q, all other components have remained flat or slightly negative.

Looking ahead, the statistical carry-over effect from a weak month December could still have an impact of first quarter growth. However, there are at least four good reasons why a disappointing fourth quarter should only have been a short stopover: i) the risk of a credit crunch is relatively low. Contrary to many European peers, German banks have not, yet, tightened their lending conditions. Due to restructuring during the early 2000s, German companies should be well prepared with cash or internal financing as the most likely alternatives to bank financing; ii) low inventories and still high backlog orders are an important safety net for the industry, ensuring production even if demand for German products would weaken; iii) export diversification, both in terms of product specialization and export destination, enables German exporters to benefit from almost any recovery on this planet. In 2011, three out of the five most German important trading partners were actually countries outside the Eurozone; and iv) the often mentioned solid economic fundamentals, above all the labour market and the absence of significant domestic imbalances, spares the economy from costly economic reforms.

The first economic contraction since the end of the recession turned out to be weaker than expected, confirming that the German economy only took a growth pause and is not approaching a new recession. Of course, a quick rebound is not an automatism and the big unknown for the German economy remains the sovereign debt crisis. One thing, however, is obvious: today’s numbers are no reason at all to start singing swan songs on the German economy.

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