Slowdown and hardly anyone notices. The German economy slowed down in the second quarter, with GDP growth coming in at 0.4% QoQ. While at face value the slowdown is mainly the result of technical factors, the underlying trend could soon give reason for concerns.
After an excessively strong first quarter, the German economy posted the expected growth slowdown in the second quarter, according to data just released by the German statistical agency. With quarterly growth at 0.4%, from 0.7% QoQ in Q1 and annual (and working-day adjusted) growth at 1.8%, from 1.9%, the German economy slowed down less than expected and should remain in the top spots of the Eurozone growth ranking. Details of 2Q GDP will only be published at the end of the month but available monthly indicators and the statistical office’s statement suggest that domestic consumption and net exports were the main growth driver. Investment and the expected technical correction of activity in the construction sector were a drag on growth.
Without any doubt, the performance of the German economy since 2009 has been impressive. In 29 quarters, the economy only shrank three times. Moreover, over this period, the economy moved from a purely export-driven model towards a much more balanced model with domestic factors currently shielding the economy against external headwinds. Sadly, as impressive this well-known growth story might be, the current recovery is clearly running on its very last leg. Ironically, the recovery is currently artificially extended by two – in German public – controversially discussed factors: the ECB’s loose monetary policy and the influx of refugees.
Looking ahead, German growth on the back of domestic drivers should hush often-heard international criticism. However, in the long run, it runs the risk of eating up the economy’s growth potential. To sustainably extend the current recovery (or initiate a new cycle), investments will have to pick up. Up to now, investment levels (except for investments in real estate) have hardly picked up, despite low interest rates. Increased uncertainties after the Brexit vote, continued structural weaknesses in many Eurozone countries and a renewed global slowdown make an organic pick-up investment rather unlikely. Directly or indirectly, kick-starting investment will require government involvement.
All in all, today’s GDP data was better than expected. In fact, they were probably too good for policymakers to change the current course and to start tackling weak investments. A risky strategy.