Germany: Robust Domestic Demand Spurs Q2 Expansion


The detailed breakdown of the Q2 national accounts confirmed a 0.7% (q-o-q) expansion in GDP, driven by solid consumer spending and a rebound in investment as the Euro zone exited its record-long recession. German private consumption quickened to 0.5% (q-o-q) while investment in machinery and equipment advanced by 0.9%, its first increase since Q3 2011. Moreover, the IFO index climbed to a sixteen-month high of 107.5 in August from 106.2 in July. This upturn in business confidence alongside the ECB’s forward guidance on low interest rates has fuelled hopes for a sustained recovery in investment going into next year. Industrial production slid by a greater-than-anticipated 1.7% (m-o-m) in July, though this was primarily payback for a strong 2.0% rise recorded in June. By contrast, construction output leapt by 2.7% (m-o-m) in July, and the sector looks set to regain momentum in Q3 following a protracted German winter which extended into Q2. Elsewhere, robust demand at home and abroad lifted the PMI for manufacturing from 50.7 in July to 51.8 in August, adding to signs of an improving economy. However, recent disappointing data on retail sales and exports underscore the still-fragile global environment. Retail sales fell for a second consecutive month by 1.4% (m-o-m) in July while a drop in Euro zone demand saw exports unexpectedly decline by 1.1% (m-o-m) over the same period. Many observers, though, are predicting a much-improved export performance over the remainder of this year.

Inflation cooled to 1.5% (y-o-y) in August from 1.9% in July, due to a marked deceleration in energy prices. Our panel has lifted its forecast for 2013 GDP growth this month.

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