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Frankfurt am Main | 22.05.2018

Growth dips in first quarter

The German economy did not grow as quickly in the first quarter of 2018 as it did in the last three months of 2017. While the Bundesbank expects the underlying economic boom in Germany to continue in spite of the dip in growth, "the underlying cyclical trend may well have decelerated unexpectedly quickly to a pace of growth that is now only slightly above potential growth," its economists write in the latest Monthly Report.

Data from the Federal Statistical Office reveal that real gross domestic product (GDP) in the first quarter of 2018 was just 0.3% higher, in seasonally and calendar-adjusted terms, than in the last three months of 2017. For the Bundesbank’s experts, this slowdown in growth is partly the result of one-off factors. One such factor – the unusually high sickness level caused by a severe flu season – restrained economic activity over the winter months, while another – the decline in exports and government consumption – can also be expected to be temporary. Industry did nothing to boost the economy because of the decline in exports. The construction sector is still beset by capacity constraints and probably barely increased its production levels, despite the brisk demand. Business-related service sectors, on the other hand, will have continued to chart an upward path, the Monthly Report explains.

Private consumption picks up

The Bundesbank notes that investment and private consumption were the main pillars supporting the subdued pace of growth, with enterprises continuing to expand their investment in machinery and equipment into the new year. While deliveries of capital goods from abroad contracted significantly, German capital goods manufacturers racked up far stronger sales in domestic business.

Private consumption, meanwhile, put its weak spell in the second half of 2017 behind it and returned to a growth path. The robust increase in the number of new car registrations by households indicates that car dealers recorded substantial sales growth. Hotel and restaurant services were also buoyant, while activity proved to be more subdued in the retail trade sector.

Labour market situation very upbeat

The Bundesbank economists also took a favourable view of the situation and the outlook in the labour market, where the number of people in work climbed by a seasonally adjusted 196,000, or 0.4%, in the first quarter of 2018. According to the Bank’s economists, this very favourable development overall is being driven solely by the increase in employment subject to social security contributions. The faster pace of employment growth, they write, is evident in both the manufacturing and construction sectors.

The very upbeat labour market situation is now also having more of an impact on wage agreements, the Bank’s experts write, pointing to the agreements for central and local government and the metal-working and electrical engineering industries, where wages are set to climb by around 3 to 3¼% per year.

Consumer prices rose fairly sharply at the beginning of the year, registering a seasonally adjusted increase of 0.4% on the quarter. "This was largely attributable to services, where prices accelerated a lot more in the first quarter of the year – in part because Easter was early this year", the Monthly Report notes. In addition, rents grew somewhat more strongly. On the year, headline HICP inflation fell from 1.6% to 1.3%, however.

Growth expected to pick up pace

The Bank’s experts expect the German economy to expand more strongly again in the second quarter, even if the pace of growth in economic activity is unlikely to match last year’s high growth rates. One-off factors such as the flu season will no longer be a burden, and the orders situation in industry remains very favourable despite a recent drop in incoming orders. Exports look set to bounce back, potentially re-establishing manufacturing as an important driver of economic activity. Buoyed by the positive labour market dynamics and accelerating wage growth, private consumption is likely to rise noticeably, the Monthly Report explains.

The Bank’s experts do concede, however, that sentiment in the German economy has deteriorated, noting that the Ifo business climate index contracted for the fifth consecutive month in April. In the opinion of the Bundesbank’s economists, however, the business climate is still far above its average level. They write that concerns surrounding protectionism in global trade and geopolitical tension may well have dampened optimism among economic agents.

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