Economic Outlook – Germany

By TJ Kim – Bonsquawk

October 24, 2012

In European Union’s effort to unwind the ongoing sovereign debt crisis, Germany is expected to take a leadership role in rebalancing the Euro area economy. Given the role that Germany is taking in the current situation, it is important to understand where Germany’s economy is heading. Greg Fuzesi from JP Morgan wrote about German economy outlook in Economic Research Note.

Germany has been growing at an above-trend pace for the past years where the general growth trend for developed nations was sluggish. However, Germany may soon face a slow-down in the economic growth.

“But as the Euro area debt crisis intensified and the global economy slowed, Germany’s export-oriented corporate sector responded in typical fashion by turning more cautious. Capital spending was cut and job creation has now slowed sharply, which is in turn impacting the outlook for consumer spending. Only residential construction is lifting more clearly in an environment of very low interest rates and easy credit conditions. Overall, the German economy has expanded at a trend-like pace in 1H12, but that was entirely due to exports as domestic demand stagnated. Exports may improve in the coming months, but without this stimulus the German economy still seems to find it difficult to generate significant growth domestically.”

The surveys also point to sluggish growth looming over the nation.

” The surveys have declined sharply since the start of the year. For 3Q12, both the German composite PMI and the IFO are signaling zero growth. Their message is mixed, though, about the last month. In particular, the September level of the PMI points to a return to marginal growth of almost 0.5%q/q saar at the end of the quarter, but the September level of the IFO points to a contraction of a similar amount. While we tend to prefer the more output-focused methodology of the PMI, the IFO cannot be ignored on statisical grounds, and therefore the overall message is that the economy is still struggling to turn around convincingly.”

In terms of domestic demand, corporates are reducing their capital investments due to external uncertainty.

“…machinery capex contracted at a 6% ar pace in 1H12 and subtracted 0.5%-pt from annualized GDP growth. Unfortunately, no clear improvement is taking place. The positive signs in July, with domestic capital goods shipments (+4%m/m), capital goods imports (+4.6%m/m), and capital goods orders (+1.5%m/m) increasing, proved short-lived. Detailed import data are not yet available for August, but domestic shipments fell again in August (- .5%m/m) and domestic capital goods orders plunged (-6.8%m/m).”

On the other hand, residential construction is still booming due to the favorable conditions to make an investment in the housing market.

“Housing permits are up 7% so far this year, the monthly house price indices are continuing last year’s upward trend, and financing conditions are very loose (with mortgage rates falling to a new record low in August).”

Overall, less corporate activities have put a downward pressure in payroll increase, which can drive consumption even further down. However, Germany still stands as a relatively strong economy with a solid growth rate and healthy national balance sheet.

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