The business cycle

Business cycle – Germany: Many more problems lie ahead.

By February 21, 2019 No Comments

According to the preliminary estimate for 4Q18, real GDP grew by 0.6% yoy, slowing from 1.2% and below our expectation of 1%. The drop most likely reflects weakening exports. In our view, the bottom of the business cycle is likely in 3Q19E, but the depth is still very much uncertain.

On the external front, sentiment indices are broadly continuing to signal a deterioration, although the ZEW expectation index appears to have hit a bottom for now. In terms of consumption, wage pressures are rising, but real compensations are still lukewarm and the recently-introduced regulations on more stringent limits for CO2 emissions have begun to bite, with new vehicle registrations having contracted by an average of 8.3%YOY for the final quarter of 2018, with a tepid rebound in January (-1.4%YOY).

Household consumption only contributed around 0.6ppts to the yoy change in real GDP last year – investment is a far bigger driver of growth and net exports were negative in the second half of the year. This means that, without a major improvement in global demand, Germany could contract this year, something that would sharply undershoot the current consensus projections of 1.2% and 1.5% growth, respectively, this year and the next, according to Bloomberg, and represents a sharp deceleration even vs. our cautious projections of 0.9% this year. In our view, two types of risks are escalating: higher tariffs on cars by the US; and a no-deal exit of the UK from the EU.