Germany: 2013 Will be Better Than it Looks

Germany: 2013 Will be Better Than it Looks

Evelyn Herrmann

The German economy grew 0.7% in 2012 compared to the previous year. After adjusting for calendar effects, German GDP grew 0.9% in real terms for 2012, according to the preliminary estimates released by the German federal statistics office yesterday. We typically watch and forecast seasonally and calendar-adjusted growth. The average annual growth would imply a quarterly contraction of 0.3% q/q in Q4 2012, in line with our forecasts.

Destatis also releases the estimates for the expenditure breakdown: Exports grew 4.1% and imports 2.3%, much slower than in previous years, but still contributed around 1.1pp to overall GDP growth. Private and public consumption grew 0.8% and 1.0%, but investment was cut back a chunky 5.2%. The latter helped net exports. Investment has the highest import content, so lower investment will eventually push the trade balance up.

As the statistical office puts it in an accompanying statement, the slowdown in growth from the post-crisis bounce-back rates of 4.1% and 3% in 2010 and 2011, respectively, to 0.9% in 2012 is more of a return to ‘normal growth rates’ than a reason for concern. From 2001 to 2007, German GDP grew 1.4% on average, including the strong pre-global financial crisis years. Potential output is most likely not far north of 1.5%, and 0.9% growth in the middle of a eurozone crisis is not bad at all.

That said, 2013 is likely to look a little weaker on an annual average, and we expect ½% growth for the year. But, there is no reason to panic. With a quarterly contraction of 0.3% q/q in Q4 2012, the annual average for the following year can only go so far. The ‘carryover’ to the new year is zero, i.e., if GDP remained unchanged for all quarters of 2013, Germany would post zero growth (last year, Germany started with a ‘carryover’ of 0.2pp).

But, the annual average would be misleading. Q1 is unlikely to be one of buoyant growth. We will see a stabilisation rather than a rebound. But afterwards, we should witness a marked acceleration in economic growth. Annual GDP is set to accelerate from its trough at 0.3% y/y in Q1 to 1.2% y/y in Q4 2013 (and beyond, thereafter).

The ‘stabilising’ effect comes from domestic consumption (57.6% of GDP). Consumers are confident in their employment position and in their financial situation; this is no wonder in the context of nearly record-low unemployment (6.9% at the end of 2012) and disposable income increases (2.3% in 2012). The labour income share has actually increased to 68% in total income from a trough of 63.2% in 2007, the end of the ‘wage moderation’ period; this should lead to higher consumption growth.

The cyclical push to growth stems from the global manufacturing cycle (26% in total value added). The trade surplus stood at 5.6% of GDP again in 2012, adding some 1.1pp to GDP growth. The biggest chunk of the surplus comes from goods exports (and 50% of the net goods exports are only cars), while the service balance is typically slightly negative. A struggling global manufacturing cycle has made life harder for German manufacturers, who already have to cope with a shrinking eurozone market. But, the improvement in leading indicators, such as the OECD composite leading indicators or the PMIs, makes us hopeful that the German manufacturing sector will be left to cope with the eurozone weakness, while foreign demand could be generated outside the eurozone.

For the political mood in the country, it is probably much better that the economy returns to growth quickly. For Chancellor Angela Merkel, it will never be easy, but at least it would be less difficult to explain to a growing economy that it could and should financially support its eurozone neighbours stuck in recession. If activity in Germany were to contract, employment were to decline and disposable income to decrease, then patience with euro-rescue support for others might become quite thin. Because all of the big political parties are fundamentally pro-European, the electorate might get even more upset because they have no one to give their vote to. But, as we signalled before, our baseline scenario is rather the opposite. Germany is past the trough now, should return to growth and could run above potential growth soon.