Thursday, November 12, 2015

German consumer defies external woes

No Friday 13th moment for the German economy. According to the just released first estimate of the German statistical agency, GDP grew by 0.3% QoQ in the third quarter, from 0.4% QoQ in 2Q. Compared with the third quarter of 2014, German GDP increased by 1.7%. 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 mainly driven by consumption and the construction sector. Investment and net exports were a drag on growth. Today’s GDP data are no relief. They only show that consumption on the back of low interest rates, a strong labour market, low inflation and higher wages is still able to offset industrial and export weakness. In fact, the summer weakness of the German industry seems to be more substantial than only a vacation-driven soft spell. The turmoil in emerging markets and the Chinese slowdown have finally left some marks on the German economy. More generally, the German industry has not managed to accelerate and shift up one gear. Somehow, the weak euro and extremely favourable financing conditions have not fully deployed their full impact on the industry, yet. This is partly the result of weakening external demand but also still the structural lack of investment incentives and projects. Moreover, there might be another interesting aspect, currently affecting the German industry: low oil prices, or better too low oil prices. While low oil prices are clearly not only benefitting German consumers but also producers by lowering production costs, the current question is whether oil prices have actually dropped too far, hurting demand from for German products from oil-exporting countries. This phenomenon of oil bill recycling, ie stronger demand from oil-exporting countries, in the past shielded the German industry against higher oil prices. Consumption, however, is holding up strongly and remains an ever important growth driver. It is not only the strong labour market with record-high employment, low unemployment and wage increases but also the drop in energy prices, boosting purchasing power. In addition, the introduction of the minimum wage has been a positive one-off for consumption. Moreover, the low interest rate environment has further motivated housing investments. Interestingly, while the saving ratio is still relatively stable, household borrowing has increased in the first half of 2015, mainly for property investments and purchases. Looking ahead, the current growth mix is unlikely to change any time soon. The industry should continue to sail in rough seas as the weaknesses in several main export partners should stay around for a while. At the same time, domestic demand, particularly consumption, looks set to continue its recent positive trend. On top of that, the influx of refugees will give at least a short-term boost to domestic demand, although the German government still plans to finance financial aid and investments for refugees without new borrowing. While today’s headline GDP data suggest a strong, healthy economy, they also mask a potential future risk. The downside of consumption-driven growth is well known and could be witnessed in several Eurozone countries during the crisis. It is a growth mix which puts future growth at risk. As long as domestic investments are not picking up, celebrations of strong German domestic demand should be taken with a pinch of salt. These days, it is hard to talk about Germany without talking about cars. For the outside world, German economic strength is very often about cars. In this regard, today’s numbers still show a strong engine with six cylinders, which currently unfortunately only runs on a few but not all cylinders.

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