German mini-growth thanks to consumption and construction boom

Despite continuing risks, the german economy’s mini-growth in the summer keeps hopes of stabilization alive. Above all, the domestic economy proves to be a reliable pillar of support.

The construction industry is booming, many consumers are in a buying mood. Even exports are proving robust, irrespective of international trade conflicts; according to the calculations published by the federal statistical office, foreign trade also made a positive contribution to the growth – not expected by most economists – in the third quarter of 2019.

However, economists expect 2020 to be another challenging year for europe’s major economy, following the early end of a year-long upswing since the crisis year 2009. "The german economy is not yet out of the woods," analyzed thomas gitzel, chief economist at VP bank group. "In the coming quarters, too, growth will remain a ride on the razor’s edge between recession and a small economic downturn … Growth."

In the third quarter of 2019, gross domestic product (GDP) increased by 0.1 percent compared to the previous quarter. The wiesbaden-based statisticians confirmed their preliminary figures presented in mid-november. Thanks to the surprising return to growth, germany as an export nation narrowly escaped a "technical recession" – i.E. Two quarters in a row with declining economic output. In the second quarter, there had still been a decline of 0.2 percent. Growth of 0.5 percent recorded at the start of the year. For 2019 as a whole, the various forecasts are for economic growth of around 0.5 percent – up from 1.5 percent in 2018.

Overall economic growth in the period from july to september 2019 inclusive was held back by consumption – on the part of both private households and the state. Many consumers are in a buying mood thanks to the historically good situation on the labor market and a trend toward rising incomes. Private consumer spending in the third quarter was 0.4 percent higher than in the second quarter. Government consumption expenditure, which includes social benefits in kind, actually rose by 0.8 percent.

The construction boom, driven by low interest rates, continued. 1.2 percent more was invested in construction in summer than in spring. By contrast, companies’ investment in machinery, equipment and vehicles declined overall, with statistics showing a 2.6 percent drop in equipment spending. VP bank economist gitzel sees this as a "warning sign".

International trade conflicts – especially between the USA and china – and the brexit drama are causing uncertainty. This will put the brakes on investment. Exports are nevertheless proving robust: in the third quarter, they were 1.0 percent above the level of the second quarter of 2019, which had, however, been comparatively weak, according to the federal office of economics and labor. Imports remained roughly at the level of the previous quarter (up 0.1 percent).

"Even though the german economy avoided a technical recession, there are few signs of an imminent recovery for the weakened industrial sector," commented ING germany chief economist carsten brzeski. "It could be risky to rely on consumption and construction alone to offset the downturn in industry."In his view, calls for further government stimulus for the weakening economy will not cease.

German economy remains "vulnerable to negative surprises," says new chief economist of state-owned forderbank k, fritzi kohler-geib. "On a positive note, however, the fiscal room for maneuver available to german policymakers will allow any recessionary damage to be contained."

The economists at commerzbank emphasize on a positive note that, according to the latest data from the world bank, germany has somewhat improved its quality as a business location for the first time in ten years: "but this can only be the beginning if germany wants to regain ground after many years of eroding competitiveness. Germany has been able to catch up, especially with a leaner bureaucracy, cheaper energy costs and lower taxes."