Germany Moves Out of Recession

According to "flash" data from the Federal Statistical Office (FSO), real GDP expanded by 0.3% quarter-on-quarter (q/q) in the second quarter of 2009, adjusted for seasonal and calendar factors. This is the first increase since the first quarter of 2008 and an encouraging turnaround from the sharp contractions of 3.5% q/q (revised up from 3.8%) in the first quarter of 2009, which had been the largest fall since reunification, and 2.4% q/q (revised down from 2.2% q/q) in the fourth quarter of 2008. The second-quarter performance was better than had been indicated by official sources such as the Economic Ministry and the Bundesbank in recent weeks. The annual rate of contraction, again calendar adjusted, decelerated from 6.7% in the first three months of 2009 to 5.9% in the second quarter. There was no working-day effect in the second quarter, meaning that unadjusted annual GDP also contracted by 5.9%.

Net Exports Behind Turnaround in Q2

Detailed data, notably for the individual expenditure components, will not be made available until the forthcoming release on 25 August. Nevertheless, the qualitative information provided by the FSO suggests that net exports provided a positive growth stimulus in the second quarter, having been a considerable drag on activity in the previous three quarters. According to the FSO, the boost from net exports arose from imports falling more sharply than exports. It is likely that imports tumbled again in the second quarter, probably due to a further steep fall in business investment and cautious firms deciding to lower inventories again. Recent evidence suggests that overall exports declined at a slower pace in the second quarter of 2009 after falling by 9.7% q/q in the first quarter. The milder slowdown was probably due to technical factors after German exports tumbled sharply around the turn of 2008. Exports, which until early last year had held up quite well in the face of the initial financial market turbulence and a strengthening euro, have been hit extremely hard by the collapse in global demand since September 2008.

Domestic Demand Mixed

Based on the initial indications provided with the "flash" data, developments among the domestic demand components were modestly more encouraging in the second quarter. Household expenditure appeared to firm in the three months, with sharply reduced inflation helping to boost consumers' purchasing power, while car sales have been lifted by the car scrappage scheme. The increase in consumer spending is nonetheless a positive surprise given the ongoing weakness of retail sales throughout the first half of 2009, as well as rising fears about unemployment as the severity of the current economic crisis is now apparent. As in the first quarter of 2009, there still appeared to be a sharp but slowing rate of decline in equipment investment during the second quarter, with firms continuing to face sluggish demand, weakening capacity utilisation, very tight credit conditions, and deteriorating profitability. However, there is increasing evidence that Germany's competitive but also cyclically exposed key plant and machinery sector is over the worst. Improving leading indicators for orders since March, notably the Ifo expectations index and the manufacturing purchasing managers' index (PMI), are encouraging for the months ahead. In addition, the strong export orientation of VDMA member firms suggests that they should be among the first to notice a pick-up in global demand. Finally, the FSO reported that declining inventories had "a negative effect on growth in the second quarter". Firms have cut their stocks sharply after increases during the second half of 2008, aiming to align inputs of raw materials and production levels with much lower demand. Finally, construction investment grew between the first and second quarters.

Outlook and Implications

The latest German data and survey evidence continue to improve, raising hopes that the economy might stabilise further in the second half of the year. This will partly represent a correction to an overshooting of demand to the downside in the first quarter of 2009 and the final quarter of 2008, while it will also reflect the apparent moderate revival of global demand since March. Net exports in particular should improve further in the second half of 2009 as exports stage a partial recovery alongside worldwide demand, whereas imports will weaken more sharply than before as private spending intentions are increasingly curtailed by rising unemployment. The softer euro compared with mid-2008 will be supportive of German exports once demand levels indeed pick up. Nevertheless, persistent problems in most of Germany's export destinations will limit the extent of this recovery—the levels of 2007 are unlikely to be reached again for several years. The main supporting influences in the months ahead will continue to be low inflation and the increasing impact of both monetary and fiscal stimulus measures, which will restrain the expected decline in private consumption. That said, real consumer spending in 2009, and most probably also in 2010, will broadly match the level already seen in 2001, indicating little need to cut back and rather growing pent-up demand.

On the negative side, investment in equipment should contract at a double-digit pace in 2009, given that capacity utilisation rates have plunged in recent months, creating a widening output gap. Even if order levels were to improve continuously in the coming months, it would be at least mid-2010 before any pressure emerged to step up investment. Public-sector infrastructure investment will partially offset the decline, however, based on the plans contained most notably in the second economic stimulus package decided in January.

Overall, Germany's persistent advantages in terms of competitiveness compared with most of its Eurozone partners should enable a relatively rapid rebound, especially of exports once global demand recovers. As the pace of this global recovery is likely to remain restrained for some time, IHS Global Insight's August interim forecast still only predicts an improvement in GDP from contraction of 5.3% (calendar adjusted) in 2009 to a 1.2% rise in 2010. Forecast risks have been shifting to the upside in recent weeks and the sharper technical rebound in the second quarter could result in a slightly lower rate of contraction in 2009.

Global Insight (Reino Unido)