German growth - strong without being impressive

Neither Greece nor China were able to stop the German economy. According to the just released first estimate of the German statistical agency, GDP grew by 0.4% QoQ in the second quarter, from 0.3% QoQ in 1Q. Compared with the second quarter of 2014, German GDP increased by 1.6%. GDP components will only be released at the end of the month but available monthly data and the statistical agency’s press release indicate that growth was driven by exports and domestic consumption. Investment was a drag on growth. The Eurozone powerhouse has successfully defied external turbulences. Despite the Greek crisis, the Chinese stock market collapse and growth slowdown fears as well as continued weakness in many Eurozone countries, the German economy continued its latest stretch of four consecutive quarters with growth averaging 0.4%. Since the last technical recession in 2012, the economy has grown by an average of 0.3% each quarter. And there is more. Exports have returned as an important growth driver, showing that Germany indeed is one of the main beneficiaries of the weaker euro. Nevertheless, not all that glitters is gold. The fact that record low interest rates, low energy prices and the weak euro have not led to a stronger expansion in our view shows that the German economy has simply reached the end of its long positive virtuous circle of structural reforms and growth. Normally, such a cocktail of strong external steroids should have given wings to the economy. This is not the case. Looking ahead, mixed monthly data have made it difficult to get a good grip on Germany’s growth outlook. While industrial production disappointed in June, new orders were encouraging and soft indicators – despite some recent weakening – remained strong. Record high employment, low inflation and decent wage growth remain strong trumps for the domestic economy and bode well for the second half of the year. However, at the same time, it is not difficult to envision a cyclical cooling of Germany’s export-driven engine. The key buyer of German capital goods, China, is in the midst of a slowdown, while Germany’s service sector and domestic consumption – despite recent positive developments – are currently still not able to fully offset a possible strong hit to exports. After the rebalancing discussion as part of the euro crisis debate, China’s slowdown will now provide new arguments in favour of more domestic investment in Germany. Finally, although highly positive in the context of the euro crisis, the latest improvement in Eurozone periphery countries will not be able to compensate for the continued stagnation of the French economy and its direct impact for German exports. All in all, the first estimate of German Q2 growth just confirmed that the Eurozone’s economic powerhouse is cruising along nicely, despite several external turbulences. While the Eurozone economy seems to see some signs of rebalancing with the stagnation in France and strong growth numbers from Spain and Greece, Germany remains an almost boring beacon of reliability. Carsten Brzeski