Worrisome German GDP Growth

May 24, 2012

Germany has been the bright jewel in a dismally performing continent.  But after data released today, the rest of Europe seems to be infecting Germany rather than having the German economic success lift other members to better times.

German first-quarter GDP grew by a decent 2.1% at an annualized rate between the final quarter of 2011 and the first quarter of this year, but a shabbier picture emerges when 1Q12 is compared to 3Q11, that is a half year earlier.  The growth rate in that period was just 0.7% annualized, less than half as much as in the prior half-year.  Germany’s growth engine in both 1Q12 and over the past two reported quarters has been net exports.  However, whereas the big story in the first quarter of this year was a 7.1% annualized advance in exports, export volume expanded just 0.4% between 3Q11 and 1Q12.  In the six-month perspective, a 1.5% annualized drop in imports, which augments net exports and therefore GDP, was the main source of strength.

Among components of private domestic demand, personal consumption edged just 0.4% higher annualized over the past six months, and the drop in machinery and equipment investment of 1.7% outweighed the lift of 1.1% in construction.  Changes in inventories also exerted a drag on GDP, depressing the growth rate by about 1.5 percentage points last quarter and over the past half-year.  Germany had modest growth powered by net foreign demand in a form, that is shrinking imports, that failed to support neighboring economies.

Over the past whole year between the first quarters of 2011 and 1Q12, real GDP increased just 1.2%.  That was only about a quarter of the 4.7% gain between 1Q10 and 1Q11.  Real GDP increased 2.5% in the year to 1Q10 but had contracted by a sharp 6.7% between the first quarter of 2008 and 1Q09.  Consequently, GDP in the four years between 1Q08 and 1Q12 averaged just 0.4% per year. 

Markit Economics, the financial service information company that calculates Germany’s purchasing managers index, released May data today that showed only the second sub-50 composite reading since July 2009 and warned of possible negative GDP growth in the second quarter of 2012 “if the situation continues to deteriorate in June.”  If indeed that happened, on-year growth would amount to 0.75% or perhaps less, easily the smallest 12-month growth rate in 2-1/2 years.  The PMI report was not entirely bleak.  Germany’s service-sector PMI remained steady at 52.2 with improved business confidence and a resilient labor market.  The 52.2 average reading in April-May was comparable to an average score of 52.5 in the first quarter and better than the 51.1 average in 4Q11.  However, manufacturing output slumped 2.7 points to a 35-month low of 44.6.  New export orders have been dropping since July of last year, which is nearly as prolonged a downtrend as felt in 2008-9, and decreased at a faster rate in May than in April.  The overall manufacturing PMI reading of 45.0 in May and average score of 45.6 in April-May compare to quarterly average scores of 49.9 in the first quarter and 48.5 in 4Q11 and thus give the impression of growth risks that are skewed to the downside.

A similar impression is conveyed by the business climate data released by the IFO Economics Institute.  Instead of easing about a half point as analysts were predicting, the overall IFO index fell 3.0 points in May to 106.9, lowest since November and 7.3 points below the reading in May 2011.  The current situation component slid 4.2 points to 113.3, while future expectations dropped by 1.8 points to 100.9, matching January’s level.  Manufacturing, construction, wholesale industries, and retailers all recorded weaker readings in May than April, and IFO officials concluded that “the recent surge in uncertainty in the euro area is impacting the German economy.”  Historically, this is not a surprising development.  Throughout the first decade of the euro’s existence, the overall Euroland economy and the German economy experienced pretty synchronized business cycles.  Before good Ezone statistics could be developed, analysts were able to do a good job of understanding the pan-Euroland economy by continuing to monitor Germany trends very closely.  The two are again moving into closer alignment, unfortunately in the context of recession.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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