IHS Global Insight Perspective

Significance: German growth of 0.4% quarter-on-quarter (q/q) during the fourth quarter of 2010 represents a further slowdown after an exceptional 2.3% q/q increase during the second quarter and a 0.7% q/q rise in the third quarter. Growth momentum continued to be driven during the quarter by investment in equipment and net exports, however.

Implications: Notwithstanding risks related to some overheating emerging economies and the lingering Eurozone debt crisis, the German economy is demonstrating solid domestic resilience to such potentially dampening factors. Persistently buoyant leading indicators of late signal that the German upswing will continue unabated in the months ahead.

Outlook: IHS Global Insight's forthcoming February detailed forecast predicts that calendar-adjusted GDP will expand by 2.7% (2.6% unadjusted) in 2011, following growth of 3.5% (3.6%) in 2010.

Germany's Economic Recovery Underpinned by Structural Developments

According to "flash" data from the Federal Statistical Office (FSO), the German economy increased 0.4% quarter-on-quarter (q/q) in the fourth quarter of 2010, adjusted for seasonal and calendar factors. This followed hardly revised quarterly growth rates of 0.6% in the first quarter, 2.2% in the second, and 0.7% in the third. The second-quarter growth surge had benefited from various one-off factors, meaning that this quarter had not been representative of the underlying growth pace in any case. The moderate further slowdown between the third and fourth quarters of 2010 was mainly due to a slump in construction investment at the end of the year caused by extraordinarily severe winter weather during December. The annual rate of growth, again calendar adjusted, nudged up from 3.9% to 4.0%. As in the third quarter, there was basically no calendar influence in the fourth quarter, meaning that the annual rate in unadjusted terms also increased from 3.9% to 4.0%.

All major components apart from construction investment apparently contributed positively to economic growth during the fourth quarter, underlining that a broad-based upswing has now been firmly established. It remains the case that improvements in competitiveness during the past decade and the flight to quality in the wake of the Eurozone debt crisis—which is keeping interest rates at much lower levels than warranted purely from the perspective of Germany's cyclical situation—are providing lasting impulses for domestic demand. The ongoing recovery in the labour market is leading to strengthening consumer spending.

Net Exports Apparently Deliver Larger Contribution to Growth

Detailed data, notably for the individual expenditure components, will not be made available until the forthcoming release of 24 February. The qualitative information provided by the FSO states that net exports provided the largest contribution to GDP growth during the fourth quarter, although it failed to indicate whether this was more the result of export strength or a setback to import momentum. Based on monthly customs trade data, both exports and imports probably posted solid but unspectacular growth during the final three months of 2010. A euro rebound in September/October will have restrained export momentum to some extent. The purchasing managers' index (PMI) sub-index for export orders picked up sharply once more during December 2010/January 2011, suggesting that exports will pick up anew in early 2011. Import volumes are being lifted concurrently by the fact that Germany's exporting firms also require many inputs from abroad, and by strengthening consumer demand.

Domestic Demand Becoming Ever More Robust

Based on the initial indications provided with the "flash" data, most domestic demand components are continuing to contribute positively. This is no longer related to any subsidy effects or one-off factors but rather reflects underlying improvement. The only exception is investment in construction, which suffered from an early start to a cold and snowy winter in November/December 2010. In addition, impulses from the government's second fiscal stimulus package on infrastructure investment had largely run their course by end-2010.

Although the increase in inflation in recent months has rather had a restraining effect on private consumption, the continually improving labour market situation is more than offsetting this in terms of rising employment and strengthening wage growth. Since October 2010, unemployment has been lower than it was at the peak of the previous economic boom in late 2008. The FSO did not provide any particular indication about government consumption in the fourth quarter, but it can be assumed that it would have mentioned it if there had been a dampening effect from this component.

Investment in equipment was apparently another major contributor to the recovery in late 2010, extending the trend already observed throughout the first three quarters of 2010. Credit conditions are now fairly favourable, which partly owes to the dampening effect of the Eurozone debt crisis on German interest-rate levels (low European Central Bank rates, flight-to-quality flows). Capacity utilisation levels broadly reached long-term averages in late 2010, suggesting that more potential for investment still lies ahead. No explicit information was provided about the development of inventories during the fourth quarter, thus we will have to wait until the detailed data are released on 24 February to see if the moderate destocking observed during the third quarter was unwound again. Data from the manufacturing PMI have shown accelerating growth for the quantity of input purchases, but with orders and production levels also picking up again the actual stock of inventories may not have increased.

Overall, with the Ifo survey, a key leading indicator, continuing to post new record highs for the post-reunification period (since 1991), domestic demand growth should pick up fresh momentum during the first half of 2011.

Outlook and Implications

Germany's underlying economic growth momentum remains robust. This can be seen from the broad-based nature of the recovery in the three latest quarters and persistently high levels of leading indicators at the data edge. Notwithstanding ongoing risks from global demand (notably the impact of measures taken by China to prevent an overheating economy and thus inflation problems) and potential further disruption related to Eurozone sovereign debt, the German economy is in a good position to weather negative influences from abroad. The most important supportive factors are healthy labour market developments, still historically low interest rates, and a fairly competitive euro.

IHS Global Insight's forthcoming February detailed forecast predicts that calendar-adjusted GDP growth will slow only moderately to 2.7% (2.6% unadjusted) in 2011 from 3.5% (3.6%) in 2010. Forecast risks are currently balanced, with external developments having more potential to surprise on the negative side and domestic developments on the positive side.