Carsten Brzeski's blog

Germany: Move along folks, no downswing to see here

This morning’s macro data brought some relief to the German economy. Rebounding exports and industrial production shows that talk of a downswing were premature. Still, the rebound comes probably too late to avoid the weakest quarterly performance of the economy since 3Q 2016.

At the same time, trade data brought more relief but did little to hush international criticism of the German trade surplus. Exports increased by 1.7% MoM, from -3.2% MoM in February. As imports dropped by 0.9% MoM, the trade surplus widened significantly to 25.2bn euro, close to the all-time high from March 2016. Obviously, talks about trade sanctions have been nothing more than talks so far and have not left any marks on the German export sector, yet.

Disappointing data, both soft and hard, since the start of the year have cast doubt about the strength of the German economy and invited speculation about the beginning of a possible downswing of both the German and the Eurozone economy. While indeed uncertainties and downside risks have increased recently, there is in our view little reason to doubt the underlying strength of the current recovery.

In fact, taking a closer look at the German economy shows promising signs of a rebound in the coming months. Despite some minor leveling off, capacity utilization is still close to record highs, assured production in the industry is close to all-time highs and the high stock of orders and historically low inventories all bode extremely well for industrial production in the coming months. Also, loans to the corporate sector are currently growing at higher rates than in the pre-crisis period.

The biggest domestic problem for the German economy is that it is almost literally coming apart at the seams. Demand is as little a problem as in the first years after reunification. Instead, supply-side factors are increasingly hampering Germany’s growth prospects. Both equipment and labour are currently at their highest levels ever as limiting factors to production. Against this background, more investments seem to be like the best and easiest way forward. It would increase production capacities and could lift the current speed limits.

All in all, the German economy is currently in the middle of a difficult combination of negative one-offs, dropping optimism and strong fundamentals. To a large extent distorted by weather effects, the timing of vacation, the flu and strikes, next week’s GDP data could show the weakest growth performance of the German economy since 3Q 2016. Today’s positive macro data will probably be the famous “too little, too late”. However, it should be enough to transform an almost disastrous start to the new year into a minor incident.