Germany and Japan avoid recession but weaker global trade bites

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

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Piya Sachdeva

Piya Sachdeva


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  • German GDP growth was flat in Q4 as stronger domestic demand helped offset trade weakness
  • Japanese GDP growth rebounds from weather-related weakness in Q3
  • The weak outlook for global trade is likely to prove a headwind for both economies in 2019

Germany narrowly avoids recession

Azad Zangana says: The flash estimate for German GDP shows the export powerhouse narrowly avoided a technical recession. Real GDP growth was flat quarter-on-quarter (q/q) in the fourth quarter of 2018 after -0.2% in the previous quarter. While the detailed breakdown has not yet been released, the German statistics office said that a rebound in domestic demand, especially in investment, was offset by a negative contribution from net trade.

Germany has had to endure weakening external demand all through 2018, but saw temporary factors hit growth in the second half of the year. These include supply disruptions in the autos industry due to the introduction of new car emissions tests, but also low water levels in the river Rhine stopped the shipping of raw materials to factories. We estimate that that the disruption in the autos industry is worth 0.5 percentage points (pp) alone on quarterly growth.

Looking ahead, we forecast German GDP to rebound over the course of the first half of the year, but this will be driven by the reversal of the temporary headwinds cited above. Meanwhile, the outlook for global trade remains bleak. A truce in the US-China trade war would be helpful, but the prospects of a US-EU trade war has recently re-emerged as President Trump seeks justification to place tariffs on imports of foreign passenger vehicles.

Japanese activity rebounds in fourth quarter

Piya Sachdeva says: The first estimate for Japanese GDP showed that growth returned to positive territory at 0.3% q/q driven by domestic demand. This follows the 0.7% q/q contraction in the previous quarter, which was mainly caused by severe weather and natural disasters, proving the weakness was temporary.

Encouragingly, growth in the final quarter was driven by domestic demand with strong contributions from consumption (0.3pp) and private non-residential investment or capital expenditure (0.4pp). For the third consecutive quarter, net exports were a drag on Japanese growth (-0.3pp), albeit this time primarily due to strong imports.

This concludes a stop-start year for Japan’s economy that strongly recovered in the second quarter following weather-related weakness in the first. The slightly weaker recovery in the fourth quarter largely reflects the weaker backdrop for global trade, which we expect to continue. Looking ahead, the key domestic headwind to the Japanese economy is the rise in Value Added Tax (VAT) scheduled for October. Front loading should initially boost growth from the second quarter but, like on previous occasions, we expect a subsequent downturn when the tax hike is implemented.

This GDP report reflects concerns by the Bank of Japan, who have become more concerned about the downside risks to the global outlook. We expect monetary policy to be unchanged in 2019.

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