Global Daily – Unsustainable German GDP spurt

by: Aline Schuiling

Euro Macro: German GDP growth to have temporarily jumped higher – The first estimate of Germany’s Q1 GDP growth will be published Wednesday morning. We expect growth to have jumped higher from the zero percent qoq that was recorded in 2018Q4, and we have pencilled in 0.6% qoq, which is above the consensus forecast of 0.4%. The expected jump in growth largely results from a sharp rebound in new car registrations (+15.4% qoq in Q1) after they collapsed in 2018H2 due to the introduction of new emission standards in September. This jump in car registrations is temporary in nature and should be followed by a slowdown in Q2. Indeed, registrations declined by 10% mom in April, implying a negative start to Q2. Besides the jump in car sales, construction output also accelerated in Q1 (up by almost 4% after 0.7% in Q4). Construction output tends to be volatile during the winter months and jumps like the one in Q1 tend to be followed by modest growth or contraction. Car registrations and construction output combined probably added around 0.3-0.4pps to overall GDP growth in Q1. On top of that we expect services sector activity as well as government expenditure to have grown robustly in Q1, compensating for a continued contraction in manufacturing.

Looking forward, we expect German manufacturing output to decline considerably in the coming months in line with the drop in factory orders in Q1 and continued deterioration in business surveys. Combined with payback in car registration and construction output, this means we expect GDP growth to slow sharply again in Q2 and Q3. A drop in growth was also signalled by the ZEW survey that was published today. The ZEW survey showed that the expectations for the Germany economy during the next six months (balance of improve minus deteriorate) fell by 5 points in May and moved back into negative territory again. Later in the year, growth should pick up again on the back of a modest improvement in global trade, but the risks to this outlook are clearly tilted to the downside, particularly the risks related to the re-escalation of the global trade war. (Aline Schuiling)