Solid German growth confirmed - curse or blessing for Merkel?

Solid growth confirmed. The second estimate of the statistical office confirmed that the German economy defied the euro crisis in the first half of the year. GDP growth in the Eurozone’s biggest economy came in at 0.3% QoQ in the second quarter, from 0.5% in 1Q 2012. Growth was driven net exports, with exports up by 2.5% QoQ, government (0.2% QoQ) and private consumption (0.4%). Investments were down by 1.8% QoQ. German growth remains well-balanced but signs of waning strength are increasing.

Looking ahead, however, there is a risk that the strong performance in the first half of the year was the last flaring up of the new German Wirtschaftswunder. The sharp drop in new orders from other Eurozone countries since the beginning of the year shows that the euro crisis has already reached the German economy. The safety net of richly filled order books and low inventories has become thinner very rapidly, not boding well for growth in the second half of the year. At the same time, low interest rates and wage increases should support domestic investment and consumption, partly offsetting the negative impact from weakening external demand. However, solid domestic demand can only cushion the slowdown of the economy but will not transform Germany into an economic island.

For German chancellor Merkel, today’s growth numbers are not as comfortable as they might look as they complicate next steps in the euro crisis. To some extent, today’s numbers are both a blessing and a curse. German growth is still too strong to convince coalition partners and also the public opinion of waning crisis immunity. However, at the same time, growth is too weak to seriously label the German economy invincible. As a consequence, chancellor Merkel looks likely to continue with her gradual strategy toward conditional integration. When Merkel meets with French president Hollande today and Greek president Samaras tomorrow, no clear decisions should be expected. Even Samaras’ latest “you-get-your-money-back” initiative in German newspapers will not (yet) do the trick. Given latest comments, chancellor Merkel seems not entirely reluctant to give Greece more time but only if it does not cost more money. In our view, however, any significant German move will only come after the next Troika report and, of course, the ruling of the Constitutional Court on 12 September.