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

© iStock.com/blackred

  • The Federal Statistical Office announced today that Germany’s economy grew by 1.5% last year. This is weaker than had originally been expected, but is a sound result that shows that the Germany economy is still growing.
  • Reasons for the weaker growth include a slower global economy, low water levels due to the long drought, the sales problems of the automotive industry due to the WLTP problem, and other special factors like the wave of influenza and strikes. In arithmetical terms, the domestic economy was the main driving force.
  • However, the special factor of the WLTP issue is gradually fading away, and the new year is bringing an additional stimulus from the implementation of the coalition agreement, e.g. with cuts to taxes and charges, and building-related child benefit. Growth will therefore continue this year.
  • Despite a slight softening of new orders, the order reserves are still very large. The construction industry is booming.
  • Income levels are rising, as is consumer spending.
  • The number of people in work is continuing to rise and unemployment is falling further.
  • The Federal Ministry for Economic Affairs and Energy today hosted the 85th Konjunkturrat für die öffentliche Hand (a government economic advisory council). The main focus of the meeting is generally on the current economic situation in Germany and the Federal Government’s economic strategy. This year also saw a detailed discussion of the effects of protectionist trade policies on growth and economic activity.

Last year, the German economy expanded by a solid 1.5% in real terms (2017 saw a boom of +2.2%) in a troubled external economic environment and despite the disruption to production and sales of cars. [1] In arithmetical terms, all of the stimuli for growth derived from the domestic economy. In view of the slowdown in the global economy, exports grew by less than in the preceding year, and by less than imports, which were driven by the strong domestic economy. Private-sector and public-sector spending on consumption expanded substantially, but by less than in the preceding year. Gross fixed capital formation saw a stronger development than in the preceding year, and factors here included not only investment in equipment and buildings, but also an increase in inventories due to the backlog of type approvals for cars. The level of inventories continued to dampen output into the fourth quarter. Nevertheless, output in the fourth quarter probably picked up speed again following the decline seen in the third quarter. New orders in industry are bottoming out and are fuelling expectations that the WLTP problem is disappearing. The domestic economy is being boosted at the beginning of the year by the substantial reduction in taxes and welfare charges for citizens and the increase in monetary welfare benefits. Economic activity is therefore likely to continue to point upwards at the beginning of the year. [2]

Global economic growth seems to be slowing. For example, industrial output had a weak start to the fourth quarter of 2018. Global trade was also slower than in the preceding year. The IHS Markit PMI for global industry was at its lowest level for two years in December 2018. The ifo index on the global economic climate also reflected a restrained mood in the fourth quarter. In view of the indicators and the current proliferation of global risks, the World Bank recently corrected its global growth forecast downwards. Overall, the latest forecasts by international organisations assume that the development in the global economy will be weaker, but still clearly positive.

This is also reflected in the figures on German exports of goods and services. For example, exports dropped in November by 1.6% in seasonally adjusted terms and in current prices. In the two-month comparison of October/November against August/September, exports rose slightly in nominal terms (+0.9%). After adjustment for prices, however, this increase is likely to be smaller. The ifo export expectations fell to a two-year low. Nominal imports of goods and services declined by 1.0% in November after seasonal adjustment. The two-month comparison shows a rise of 1.3%. However, given rising import prices, the price-adjusted rise here is also likely to be smaller. Overall, the indicators are suggestive of a restrained development in exports in the coming months.

Output in the goods-producing sector shrank further in November, with bridging days taken off between public holidays and weekends playing a role here. Industrial output declined by 1.8% in November and by 1.5% in the two-month comparison. Construction output also fell in November, by -1.7%. In the two-month comparison, the drop was 0.9%. New orders in the manufacturing sector fell by 1.0% in November, and by 0.3% in the two-month comparison. Despite this, in the last two months they were roughly a ½ percentage point above their average level in the third quarter. Together with the large cushion of order reserves, which suffices for 5.5 months, this suggests that the industrial sector will pick up some speed again. Also, the important sector of cars and car parts registered far more orders in October and November (+4.1% and +4.5% respectively).

In view of the good employment and income development, consumer spending rose substantially in 2018, by 1.0%, but this was nevertheless much lower than the 1.8% rise in real disposable income. According to figures from the Federal Statistical Office, the savings ratio of private households rose by 0.4 percentage points in 2018, which in turn meant lower consumer spending. On the other hand, retail turnover (excluding vehicles) followed the negative development in the third quarter by picking up speed again in October and November (+0.1% and +1.4% respectively). Against the background of the WLTP issue, overall new registrations of privately owned passenger cars were again lower in the fourth quarter than in the preceding quarters. However, the market has turned the corner. Since October, each month has seen an improvement in the number of new car registrations. An ongoing rise in disposable income also suggests that consumer spending will develop positively in the coming months, with a further boost at the turn of the year from the cuts in taxes and welfare charges.

The labour market continued to deliver good news at the end of 2018. Gainful employment expanded to more than 45.2 million people in November. In seasonally adjusted terms, the rise of 34,000 people over the preceding month was in line with the average of recent months. The number of jobs requiring social insurance contributions increased sharply following a weak performance in the preceding month. Corporate demand for labour remains very high in many sectors, but there are indications, e.g. on the market for temporary agency workers and in the construction sector, of a calming. The number of unemployed decreased by 14,000 in seasonally adjusted terms in December; the unadjusted figures show a smaller drop than usual for the time of year to just above 2.2 million. As a result, the unemployment rate rose slightly to 4.9%. Long-term unemployment is steadily falling; the year-on-year level was down by more than 11%. The need to strengthen the economic potential of structurally weak regions continues to pose a challenge.

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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 February 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 at the end of the 5th calendar week of 2019.

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[1] Report on GDP figures for 2018 issued by the Federal Statistical Office on 15 January 2019.
[2] This report is based on statistical data that were available as of 15 January 2019. 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.