German GDP: Normalization in the summer

German GDP: Normalization in the summer

• After the exceptional spring quarter, a strong slowdown in the growth dynamic is inevitable. The data already available do, however, point to a still robust pace of the recovery.
• While the foreign trade numbers point to a breather for net exports in the short term despite still clearly rising new orders, domestic demand continued to point clearly north.
• Private consumption is profiting primarily from the solid labor market. Alongside tax incentives, the rapid improvement in capacity utilization is supporting business investment. And construction was able to escape a strong correction, not least because of the stimulus program.
• The odds on the upswing continuing with "more normal" industry growth and an expanding domestic economy in 2011 are rather good thus far. We lift our GDP forecast for next year from 1.9% to 2½%.

Exceptional spring quarter

The German economy put the pedal to the metal in the spring. GDP surged 2.2% qoq, the highest growth rate since German reunification. The quicker-than-expected recovery was driven by the rapid revival of global industry demand, which is in the interim also increasingly stabilizing the domestic economy. Above and beyond that, the catch-up effects because of the preceding cold winter with heavy snow had a noticeably positive impact on growth in the second quarter.

But how did the economy perform in the summer quarter that has just ended following the exceptionally strong spring quarter? The first GDP estimate will not be released until 12 November. There is, however, informative data already available for the first two months of the quarter. And the final month of a quarter can only have a material impact on the overall reading for the quarter in the event of very strong fluctuations. For that reason, we discuss below – as every quarter - the numbers available so far and draw implications for the individual GDP components

as well as overall growth for the quarter as a whole.

Net exports take a breather

Export demand has until recently remained the engine driving the German upswing. After already three strong preceding quarters, the export dynamic accelerated very strongly again in the spring to 8.2% qoq. As a result, the volume of real exports was only just shy of the pre-crisis high. Moreover, the most recent export numbers show much weaker but still solid growth.

In the first two summer months, real merchandise exports were up an extrapolated 2.5% qoq. However, price-adjusted imports succeeded in posting even stronger growth of over 3%. Based on this data, our model forecast for the third quarter shows relatively neutral net exports after a growth impulse of a high 0.8 percentage points in the spring. The comparison of the model forecasts with the actual readings shows that the model is generally a good predictor of the foreign trade numbers.

There can, however, be deviations, since the monthly numbers do not, for example, include imports and exports of services, which account for roughly 15% of total exports.

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Full report: German GDP: Normalization in the summer