Today has brought the economic engine of the Euro ares into focus as we digest a barrage of data from and about Germany. We find that the second effort at producing economic output figures for the second quarter has produced a small improvement.
WIESBADEN – The gross domestic product (GDP) fell sharply by 9.7% in the 2nd quarter of 2020 on the 1st quarter of 2020 after adjustment for price, seasonal and calendar variations. According to the Federal Statistical Office (Destatis), the GDP drop in the 2nd quarter of 2020 was not quite as steep as reported in the first release of 30 July 2020 (-10.1%).
This means that the comparison with last year improved as well.
11.3% on the same quarter a year earlier (price-adjusted)
The last figure is revealing in that it reminds us that the German economy had been in something of a go-slow even before the Covid-19 pandemic hit. Also we note that the hit was in broad terms double that of the credit crunch.
The slump in the German economy was thus much larger than during the financial and economic crisis of 2008/2009 (-4.7% in the 1st quarter of 2009) and the sharpest decline since quarterly GDP calculations for Germany started in 1970.
The Details
With a lockdown in place for a fair bit of the quarter this was hardly a surprise.
As a consequence of the ongoing corona pandemic and the restrictions related with it, household final consumption expenditure fell sharply by 10.9% in the 2nd quarter of 2020.
What is normally considered to be a German strength fell off the edge of a cliff as investment plunged.
Gross fixed capital formation in machinery and equipment even dropped by as much as 19.6%.
Which made the annual picture this.
Gross fixed capital formation in machinery and equipment fell sharply by 27.9% after already dropped considerably by 9.5% in the 1st quarter.
Also a platoon of PhD’s from the ECB will be on their way to work out what has gone on here?
Gross fixed capital formation in construction also declined markedly (-4.2%) in the 2nd quarter, which was due in particular to the exceptionally strong 1st quarter (+5.1%).
The ECB PhD’s may be able to write a working paper describing what their bosses would consider a triumph. Or at least, something described as a triumph on the crib sheet provided to ECB President Christine Lagarde.
Gross fixed capital formation in construction, which was 1.4% higher than in the 2nd quarter of 2019, also had a supporting effect year on year.
Looking at the annual comparison it has not been a good year for net exporters.
Foreign trade fell dramatically also compared with a year earlier. Exports of goods and services fell by 22.2% (price-adjusted) in the 2nd quarter of 2020 year on year. Imports did not drop as strongly (-17.3%) over that period.
Something else which you might reasonably consider to be not very Germanic has been in play.
Only final consumption expenditure of general government had a stabilising effect; it was 1.5% higher than in the previous quarter and prevented an even larger GDP decrease………( and the annual data) In contrast, an additional 3.8% in government final consumption expenditure prevented the economy from crashing even more.
We know that the unemployment numbers have been actively misleading in the pandemic but I note that the hours worked data gives a similar picture to GDP.
The labour volume of the overall economy, which is the total number of hours worked by all persons in employment, declined even more sharply by 10.0% over the same period.
This had an inevitable consequence for productivity.
Labour productivity per person in employment slumped by as much as 10.2% compared with the 2nd quarter of 2019.
Savings
I thought I would pick this out as it is a clear development in the Covid era.
The relatively stable incomes, on the one hand, and consumer reticence, on the other, resulted in a substantial rise in household saving. According to provisional calculations, the savings ratio nearly doubled to 20.1% in the 2nd quarter of 2020 year on year (2nd quarter 2019: 10.2%).
Looking Ahead
This morning’s IFO release tells us this.
Sentiment among German business leaders is continuing to improve. The ifo Business Climate Index rose from 90.4 points (seasonally adjusted) in July to 92.6 points in August. Companies assessed their current business situation markedly more positively than last month. Their expectations were also slightly more optimistic. The German economy is on the road to recovery.
Although a somewhat different context was provided by this.
In manufacturing, the business climate improved considerably. Companies’ assessments of their current situation jumped higher. Nevertheless, many industrial companies still consider their current business to be poor. The outlook for the coming months was again more optimistic. Order books are filling once more.
That showed a welcome improvement but only to a level considered to be poor so it is hardly surprising they are optimistic relative to that. Indeed trade seems to have engaged reverse gear.
In trade, the upward trend in the business climate flattened noticeably. Companies were somewhat more satisfied with their current situation. However, their pessimism regarding the coming months was almost unchanged. In wholesale, the business climate in fact fell back.
Perhaps they are getting a little more like us in the UK as the services sector seems to be on the road to recovery.
In the service sector, the Business Climate Index rose strongly. Service providers were decidedly happier with their current business situation. Their outlook for the coming six months also improved further.
Considering the GDP numbers you might think that construction would be more upbeat.
In construction, the business climate continues to improve. Construction companies were again happier with their current situation. However, their expectations are still pessimistic, albeit less so than last month.
Comment
If we take the example below where would that leave Germany?
Germany IFO expects GDP growth of around 7% in Q3 ( DailyFX.com )
If we take the unadjusted figure of 93.46 for the second quarter then we will rise to 100 or if you prefer we will have stepped back in time to 2015. So the “Euro boom” and all the ECB backslapping will have been wiped out. The 7% economic growth recorded over the period will be ground that will have to be re-taken. That will be not so easy as we see renewed but hopefully more minor Covid-19 outbreaks in other parts of the Euro area.
I am a little unclear how @Economist_Kat gets to this.
#Germany: #ifo survey results for August are consistent with the economy moving into Boom territory.
Perhaps too much kool-aid. According to a @LiveSquawk the official view is that things can only get better.
German FinMin Scholz: Economy Developing Better Than Expected
Meanwhile official policy has the pedal to the metal with an official interest-rate for banks at -1% and two QE bond buying schemes running at once. We also have fiscal policy being deployed on a grand scale, especially for Germany. There is little scope for it to do more.