Distinct growth in German economy in winter
The German economy got off to a good start in 2019, after economic output had largely stagnated in the second half of 2018. According to the Federal Statistical Office’s flash estimate, first-quarter real gross domestic product (GDP) was 0.4% up on the quarter after seasonal and calendar adjustment. However, temporary one-off effects played an important role in this marked increase, the Bundesbank economists write in the May Monthly Report.
One-off effects providing impetus
The economists believe that the expansionary fiscal measures which entered into force at the start of this year gave added impetus to private consumption, which also received a further boost from car purchases that had earlier been deferred. In the second half of 2018, a considerable number of car purchases had been put on hold owing to supply shortages following the introduction of the Worldwide Harmonised Light Vehicle Test Procedure (WLTP), the new emissions testing procedure. Construction activity was brisk in the first quarter, facilitated primarily, according to the Bundesbank, by favourable weather conditions in February and March 2019.
“Disregarding these one-off factors, the underlying cyclical trend nonetheless remained weak overall, as it has been since mid-2018,” the authors write.
Boost from private consumption and construction investment
Aside from construction, the catering and hotel industry and retail sector gave a boost to the economy, assisted by the one-off effects. Commercial services, too, are likely to have shown marked growth in the reporting period, according to the Bundesbank. By contrast, the broad-based downturn in industry continued. On the demand side, the economists report that the key driver of growth was probably private consumption, which thus overcame the slump it underwent in the second half of 2018. Despite anaemic industrial activity, business investment in new machinery, equipment and plants saw a distinct increase. Construction investment also expanded considerably. Exports likewise rose.
Broad-based export growth
The Bundesbank’s experts estimate that German enterprises’ export business expanded markedly, in real terms, in the first quarter of 2019. From a regional perspective, exports saw a fairly broad-based increase, primarily to euro area countries. According to the Monthly Report, there was a somewhat smaller increase in exports to non-euro area countries, while there was a strong rise in exports to the United Kingdom. The Bundesbank notes that one-off effects due to the UK’s withdrawal from the EU, originally planned for March, may have played a part here. There was also stronger demand for German products in China and the United States. German exporters likewise reported a major increase in sales to Russia and Japan. After the earlier dramatic declines, the value of exports to Turkey showed an especially strong rise. (A more detailed analysis of the financial and economic crisis in Turkey and its impact on German exports can be found on pp. 50 and 51 in german Version of the Monthly Report.)
Labour market continuing to improve
Despite the slower underlying cyclical trend, Germany’s labour market continued to improve in the first quarter of 2019 according to the Monthly Report. As before, the rise in employment was mainly due to the positive developments in jobs subject to social security contributions. Between January and March 2019, the number of persons in work in Germany increased by 149,000 or by 0.3% after seasonal adjustment, which was a somewhat stronger rise than in the three preceding quarters. By contrast, the number of self-employed persons and persons working exclusively in low-paid part-time jobs continued to go down. Even so, there was a fall, albeit only marginally in number of unemployed persons.
The Bundesbank’s experts point out in the Monthly Report that, in a sector analysis, it is mainly construction where the number of employees was rising at a higher rate.
“The significant improvements to remuneration in construction last year may have boosted the sector’s relative attractiveness,” they write. In 2018, the construction sector, which was operating at the limits of its capacity, had been struggling to find additional workers.
Overall, demand for labour was rising significantly faster than the labour supply in Germany at the end of the period under review. Despite falling employment and the growing participation of domestic workers in the labour force, no more than just under half of the new jobs were filled by persons with German citizenship, according to the Monthly Report. Immigration from the rest of the world is still considerable, albeit on a slight downward trend. The Bundesbank’s experts note that roughly one in five of the additionally created jobs were filled by a person from one of the countries that have joined the EU since 2004. In addition, they write that the integration of refugees into the labour market is making rapid progress.
Robust wage growth
Negotiated wages also showed a steep rise in the first quarter. Bundesbank economists attribute this chiefly to the last year’s wage settlements, which were higher than before on account of marked shortages on the labour market. Negotiated pay rates, including additional benefits, were 2.9% up on the year, as in the final quarter of 2018. Likewise, the new agreements concluded in the 2019 pay round mainly envisage steeper wage rises than in the years from 2015 to 2017, according to the Monthly Report.
Sluggish underlying trend expected to continue
The Bundesbank expects the split pattern in the economy, which has been characterising business activity in Germany since the summer of 2018, to remain in place in the second quarter of 2019:
“While the downturn in industry will continue, the expansionary forces in the more domestically-oriented sectors are still intact.” The Bundesbank’s experts estimate that German economic output in the second quarter of 2019 is unlikely to exceed its level in the first quarter, which was boosted by one-off effects. They assume that these effects will come to an end or even go into reverse. It is also likely that the catch-up processes for car purchases are largely complete.
“Against this backdrop, a gradual rebound in economic activity in Germany can only be expected in the second half of the year alongside a recovery in the global economy,” the Report states.