Economic growth in Germany converged with that in Italy in the latter part of 2018

by Shaun Richards

As we arrive in the UK at “meaningful vote” day which seems about as likely to be true as a Bank of England “Super Thursday” actually being super the real economic news comes from the heart of the Euro area. So here it is.

According to first calculations of the Federal Statistical Office (Destatis), the price adjusted gross domestic product (GDP) was 1.5% higher in 2018 than in the previous year. The German economy thus grew the ninth year in a row, although growth has lost momentum. In the previous two years, the price adjusted GDP had increased by 2.2% each. A longer-term view shows that German economic growth in 2018 exceeded the average growth rate of the last ten years (+1.2%)……….As the calendar effect in 2018 was weak, the calendar-adjusted GDP growth rate was 1.5%, too ( German statistics office )

A little care if needed as these numbers are not yet seasonally adjusted. But we do have price-adjusted numbers have gone 2.2% (2016) then 2.5% (2017) and now 1.5%. This immediately reminds me of the words of European Central Bank President Mario Draghi at his last press conference.

 I’ll be briefer than I would like to be, but certainly especially in some parts of this period of time, QE has been the only driver of this recovery. There are lots of numbers that we can give about how it did change financing conditions in a way that – in many ways. But let’s not forget that interest rates had dramatically declined even before QE but they continued to do so after QE…….. We view this as – but I don’t think I’m the only one to be the crucial driver of the recovery in the eurozone. At the time, by the way, when also other drivers were not really – especially in the first part, there was no other source of growth in the real economy.

This comes to mind because if you take that view and now factor in the reduction in the monthly QE purchases and then their cessation in 2018 then the decline in GDP growth in Germany was sung about by Radiohead.

With no alarms and no surprises
No alarms and no surprises
No alarms and no surprises
Silent, silent

In essence if we switch to the world of football then 2018 was a year of two halves for Germany because if we go back to half-time we were told this.

Compared with a year earlier, the price adjusted GDP rose 2.3% in the second quarter of 2018.

At that point economic growth seemed quite consistent at around 0.5% per quarter if we ignore the 1,1% surge in the first quarter of 2017. So Mario’s point is backed up by German economic growth heading south in the second half of 2018 which if we now look wider poses an implication for another part of his speech.

 Euro area real GDP increased by 0.2%, quarter on quarter, in the third quarter of 2018, following growth of 0.4% in the previous two quarters.

We do not have the final result for the second half of 2018 but the range seems set to be between -0.1% and 0.1%. Ironically it means that the quote below from the Italian economy minister is rather wrong.

*TRIA: EU TO FACE POTENTIAL COLLAPSE IF POLICIES FEED DIVERGENCE

As we stand the German economic performance has in fact converged with the Italian one.

Detail

There has been quite a slow down in domestic consumption because at the end of the second quarter we were told this.

Overall, domestic uses increased markedly by 0.9% compared with the first three months of the year.

Whereas now we are told this was the situation six months later.

Both household final consumption expenditure (+1.0%) and government final consumption expenditure (+1.1%) were up on the previous year. However, the growth rates were markedly lower than in the preceding three years.

That is not an exact comparison because investment is not in the latter and it has remained pretty strong but nonetheless there has been quite a fall in domestic consumption. Also investment has not turned out to be the golden weapon against an economic slowing.

Total price-adjusted gross fixed capital formation rose 4.8% year-on-year.

Also a usual strength for the economy was not on its best form.

German exports continued to increase on an annual average in 2018, though at a slower pace than in the previous years. Price-adjusted exports of goods and services were up 2.4% on 2017. There was a larger increase in imports (+3.4%) over the same period. Arithmetically, the balance of exports and imports had a slight downward effect on the German GDP growth (-0.2 percentage points).

In terms of the world economy that is a good thing as many have argued ( including me) that the German trade surplus is an imbalance if we look at the world economy. The catch is how you fix it and shrinking it in a period of economic weakness is far from ideal. Also another number went against the stereotype.

 For the first time in five years, short-term economic growth in industry was lower than in the services sector.

Lastly these are not precise numbers but output per head of productivity growth seems to have slowed to a crawl.

On an annual average in 2018, the economic performance in Germany was achieved by 44.8 million persons in employment whose place of employment was in Germany. According to first calculations, that was an increase of roughly 562,000 on the previous year. This 1.3% increase was mainly due to a rise in employment subject to social insurance.

1.5% is not much more than 1.3%.

Fiscal Policy

This is not getting much attention but you can argue that Germany has made the same mistake in 2017/18 that it made in 2010/11 in Greece albeit on a much smaller scale.

General government achieved a record surplus of 59.2 billion euros in 2018 (2017: 34.0 billion euros). At the end of the year, central, state and local government and social security funds recorded a surplus for the fifth time in a row, according to provisional calculations. Measured as a percentage of the gross domestic product at current prices, this was a 1.7% surplus ratio of general government for 2018.

It has contracted fiscal policy into an economic slow down and thereby added to it.

Comment

As these matters can get very heated on social media let me be clear I take no pleasure in Germany’s economic slow down. For a start it would be illogical as it will be a downward influence on the UK. But it has been a success for the monetary analysis I presented in 2018 as the fall in the money supply was both an accurate and timely indicator of what was about to happen next.

Official policy has seen a dreadful run however. I have dealt with fiscal policy above which has been contracted in a slow down but we also see that the level of monetary stimulus was reduced. Apart from the obvious failure implied by this there are other issues. The most fundamental is a point I have made many times about Euro area economic growth being a “junkie” style culture depending on the next stimulus hit. That has meant it has arrived at the next slow down with the official deposit rate still negative ( -0.4%) as I have long feared. Still I suppose it could be worse as the Riksbank of Sweden managed to raise interest-rates in this environment after not doing so when the economy was doing well.

Let me post a warning to avoid the Financial Times article today about UK Index-Linked Gilts. No doubt this will later be redacted but in the version I read the author was apparently unaware that the RPI inflation measure not CPI is used for them.

 

 

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