Germany returns to growth

  • Germany’s economy grew by 0.4% in Q1, after zero growth in Q4 2018
  • Temporary disruptions, including changes to car emissions tests, have largely abated
  • Trade wars remain a major risk given Germany’s status as one of the world’s biggest exporters

The German economy rebounded in the first quarter of the year thanks to higher household spending and construction activity. According to the flash estimate released by Destatis, real GDP grew by 0.4% quarter on quarter, an increase from no growth in the fourth quarter of 2018, and -0.2% in the previous third quarter.

Germany’s economy has been buffeted by a number of headwinds in recent quarter. Changes to car emission testing following the Volkswagen scandal led to a Europe-wide backlog of testing and supply of new passenger vehicles.

In addition, a drought in Northern Europe caused the water level of the river Rhine to fall to the point where cargo could not be shipped in or out of key manufacturing hubs. These temporary disruptions have almost abated, enabling activity to rebound to more normal levels.

Looking ahead, while the domestic demand situation has stabilised, the outlook for external demand is darkening. The escalating trade war between the US and China is likely to continue to have hurt international trade and demand for German exports. Both exports and imports are reported to have risen in the first quarter, but the net position appears to have been neutral.

Should the US administration follow through on its threat of tariffs on EU car exports, then a full transatlantic trade war will ensue, generating a major downside risk for Germany as one of the biggest exporters in the world. Our forecast assumes the US will not go that far, but at the same time, we do not expect any meaningful rebound in external demand in the near future.