The end of the Wirtschaftswunder?

The German economy contracted in the second quarter of 2014, for the first time since 4Q2012 (or after switching to the new national accounts: 1Q13). According to the first estimate of the statistical office, German GDP dropped by 0.2% QoQ, from a slightly downward revised increase of 0.7% QoQ in the first quarter. On the year, the economy still grew by 0.8% (working day corrected 1.2%). GDP components will only be released at the end of the month but available monthly data and the statistical office’s press release suggest that the downturn was driven by weaker net exports and investments, consumption should have been positive. The final jury is still out - at least until 11 am CET when Eurozone GDP data will be released - but the German contraction has clearly increased chances that for the first time since 2007 the Eurozone has outpaced its own growth engine. However, in our view, this does not mark a turnaround in the euro crisis but is rather a symptom of the current common race to the bottom. As long as the second and third largest Eurozone economies (France and Italy) are struggling to accelerate their reform pace, the German economy will remain the Eurozone’s main growth engine. Returning to the German economy, today’s stagnation as such is no reason to get overly concerned. Contrary to a common belief, the stagnation is not so much the result of crisis in the Ukraine and European sanctions on Russia but it’s rather homemade. Or better: homemade and Eurozone-made. The reversal of the mild-weather-effect on the construction sector, an unusual amount of holidays in May combined with ongoing problems in France and Italy should have been the main drivers of the slowdown of the German economy. While the direct impact of geopolitical risks on the German economy was limited in the second quarter, ongoing or even further worsening tensions around the world obviously don’t bode well for the second half of the year. Probably not so much through the export channel but through the return of uncertainty and fear. The latter could once again delay the urgently needed rebound of domestic investments. In the short run, the German economy can remain the Eurozone’s growth engine as the strong labour market and higher wages will support private consumption and strong growth in the US and the UK should more than offset export losses elsewhere. Without stronger domestic demand, however, such a growth model could quickly become unsustainable. All in all, today’s GDP data do not mark a turnaround in the euro crisis but for Germany they are a strong reminder that too much economic complacency can easily backfire.