October 25, 2012
The latest survey data for October was a double-whammy for growth prospects in Germany. The ifo index fell for the sixth consecutive month and is now well below its historic average. This was caused by a strong drop in the assessment of the current business situation, while the 6-months forward expectations remained on an unchanged low level. Furthermore, the purchasing manger index deteriorated as well. The decrease was more pronounced for the export dependent manufacturing sector (where the survey points to significant falls in industrial production in the next couple of months) than it was for the services sector (where it roughly points to stagnation). Compared to its Q3 average the PMI did not fall, but this was due to the unusually strong September value.
Some mechanistic regressions based on different components of the ifo and the PMI suggest Q3 and Q4 GDP decreases between ¼ and ½ % qoq (assuming no change in the indices for Nov./Dec.). However, a regression based on hard data (industrial production, unemployment and retail sales) still points to modest growth in Q3. Overall, we would say that risks to our forecasts of small quarterly gains in GDP in Q3 and Q4 (+0.1% qoq) are to the upside in Q3 and to the downside in Q4. As a result GDP is likely to roughly stagnate in H2.
This would translate into a significant slowdown compared to H1 and shows that Germany’s growth prospects are far from insulated from the troubles in Euroland. In H1 Germany’s GDP still grew at a healthy rate despite the dampening effects from the ongoing austerity in many EMU countries as well as the uncertainty emanating from the euro crisis. This was possible due to the strength of export demand from US and Asia (likely to fade) as well as rather strong private consumption (likely to continue). In Q1 and Q2 German GDP grew 0.5% and 0.3% qoq, respectively.