Growth curve with pen symbolizes the economic situation; source: iStock.com/blackred

© iStock.com/blackred

  • Special effects interrupt upswing in third quarter. Cause was the WLTP problem in the automotive industry. As these special effects disappear, the upswing of the German economy will resume.
  • Output in the goods-producing sector declined in the third quarter, particularly due to this special effect. In the last two months, new orders in the manufacturing sector have been rising again, and the level of orders on the books remains very high. The construction industry is booming.
  • Incomes and consumer demand are continuing to trend upwards. Retail sentiment is also good.
  • The positive developments in terms of employment and unemployment are continuing. Structural problems on the labour market are still posing challenges

The German economy’s upswing was temporarily interrupted in the third quarter. Adjusted for price, calendar-day and seasonal effects, gross domestic product was 0.2% down compared with the preceding quarter. [1],[2] According to the available indicators, the third quarter was marked by weak consumer spending, strong imports, which meant that the contribution of foreign trade to growth was negative, and a tangible increase in inventories. The main reason for the weak overall development was the WLTP problem in the automotive industry. The required switch to the new test cycle has triggered a backlog of type approvals. Industry concentrated its production on the models that had already been approved, and private households in Germany and abroad held their purchases back. Gross domestic product is likely to have been reduced by up to 0.4 percentage points in the third quarter as a result. The WLTP problem is a temporary issue. As the backlog of type approvals is dealt with, the upswing will recommence as early as the fourth quarter. This is underscored by the indicators for industry and the economy as a whole, and also by the development in the external economic environment. Economic activity in the European Union continued to point upwards in the third quarter, and the U.S. economy is booming. Despite all the problems, the global economy is continuing its upswing.

However, the signs from the global economic environment are mixed. Global industrial output is continuing to display somewhat less dynamism than last year, but world trade seems to have bottomed out following the weaker second quarter. The IHS Markit Global Composite PMI rose in October following three successive falls driven by services, whilst the ifo index on the global economic climate reflects a very restrained mood for the fourth quarter of 2018. The autumn forecasts by international organisations also continue to assume that the development in the global economy will be positive, but weaker than expected in previous forecasts.

The mixed signals on the external economic front are also reflected in the figures on German exports of goods and services. In September, exports fell slightly, by 0.9% in seasonally adjusted terms and in current prices. In the third quarter, exports remained constant in nominal terms. In price-adjusted terms, however, they declined. Ifo export expectations are at the lowest level seen this year, and do not point to a clear pick-up in exports. Nominal imports of goods and services fell further in September, down by 1.3% in seasonally adjusted terms. In the third quarter, however, the strong July figures resulted in a 2.9% increase in imports. The price-adjusted development was probably also clearly positive, despite rising import prices.

In the goods-producing sector, output dropped by 0.9% in the third quarter. This was triggered by a temporary slowdown in industry, which was almost entirely due to the automotive sector. Latest figures show industrial output unchanged in September, but down by 1.4% in the third quarter. In contrast, the construction sector saw a quarterly expansion of 0.5%. New manufacturing orders followed a rise of 2.5% in August with a 0.3% increase in September. The quarterly comparison, however, revealed a fall of 1.0%. As the backlog of type approvals due to the switch to the new WLTP test cycle for cars is gradually dealt with, industrial output is likely to pick up speed again towards the end of the year. This is also suggested by the very good situation on the order books, with orders covering 5.5 months. The construction sector is working at nearly full capacity, and its boom is set to continue.

The good development of the labour market and sharp wage rises are ensuring that consumer spending will basically continue to be an important pillar of the German economy. The latest figures for retail sales do however suggest a slight softening in the third quarter. The slight increase of 0.1% seen in September was not sufficient to result in a positive overall figure for the third quarter (-1.0%). Automotive sales also fell slightly in August. Against the background of the WLTP issue, new registrations of privately owned passenger cars were weak in the third quarter. The new registrations of private cars did not start rising clearly again until October. Rising incomes continue to suggest that consumer spending will develop positively in the coming months. The indicators of sentiment paint a mixed picture at present. The ifo retail business climate worsened in October, whilst consumer sentiment remained stable according to the latest figures.

The labour market continues to deliver positive news. Employment reached a new record level of 45.2 million people in September. This is due to the sharp rise in employment subject to social security contributions. In comparison with August, total employment was up by 39,000 (seasonally adjusted). The rise in jobs subject to social security contributions in August was a little higher than the average rise seen in the preceding six months, at 56,000 people. The leading indicators continue to underscore the strong demand from companies for labour. In October, the seasonally adjusted number of unemployed persons dropped by 11,000; according to the unadjusted figures, they fell to 2.2 million as the autumn pick-up commenced. Long-term unemployment is continuing to decline. Tackling it further, and boosting the economic potential of structurally weak regions, continue to pose challenges.

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Note:

A detailed report and commentary on the overall situation and trends in the German economy will be published in the December edition of the monthly report, Schlaglichter der Wirtschaftspolitik (‘Economic policy highlights’, in German only). This report is expected to be available on the website of the Federal Ministry for Economic Affairs and Energy in the course of the 48th calendar week of 2018.

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[1] Preliminary data on GDP development in the third quarter of 2018 issued by the Federal Statistical Office on 14 November 2018.
[2] The report is based on statistical data available as of 14 November 2018. Unless stated otherwise, these are rates of change against the respective preceding period on the basis of price-adjusted figures which have also been adjusted for calendar-day and seasonal variations.