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Monthly Report: Industry and exports responsible for economic slowdown

Economic output in Germany dipped slightly in the second quarter of 2019. The Federal Statistical Office (also known as Destatis) announced that gross domestic product (GDP) – the value of all goods and services produced in Germany – fell by 0.1% in seasonally adjusted terms on the quarter. At the start of 2019, the German economy was still showing growth of 0.4%. Bundesbank President Jens Weidmann described the recent slowdown as an economic “slump”. “The domestic economy is still doing well; the weaknesses have so far been concentrated in industry and exports. International trade disputes and Brexit are important reasons behind this,” Mr Weidmann said. The Bundesbank’s current Monthly Report states that the slight economic slowdown affected many sectors in Germany: “Sales in construction and in the hotel and restaurant sector declined. Wholesale trade slid into the downturn afflicting industry”, the Bank’s economists write. Only retail trade as well as some other services sectors are likely to have provided positive momentum.

One-off effects had a dampening effect

In the report, Bundesbank experts examine the causes of the GDP contraction in detail, and point out that the downturn in industry accelerated somewhat due to a decrease in foreign demand. In particular, exports to the United Kingdom were weak in the second quarter. A contributing factor to this, according to the Bundesbank’s economists, was the original Brexit date scheduled for the end of March. This resulted in substantial stockpiling in the United Kingdom over the winter months. This led to a countermovement in the second quarter. Furthermore, one-off effects that had supported economic activity in the first quarter had a distinctly dampening effect on the still intact domestic expansionary forces. Construction output declined steeply after posting a sharp increase during the first quarter due to favourable weather conditions. Meanwhile, the demand for cars, pent up by delivery bottlenecks last year, had largely been met at the start of 2019 and did not increase further in the second quarter. The Bundesbank economists write that this depressed private consumption.

Businesses likely held back on investing

Demand also suffered from broad-based weakness. Against the backdrop of the sharp contraction in exports and “in light of declining capacity utilisation and the subdued outlook for manufacturing, businesses probably held back on investing in new machinery and equipment,” the Bundesbank’s experts write in their report. They point out that construction investment also fell. Private consumption is not likely to have exceeded the level of the strong preceding quarter by much. Government consumption may have provided the only meaningful boost to economic activity.

Economic activity could decline slightly again in the current quarter, the economists suggest. There are, they write, no signs yet of an end to the downturn in industry, adding: “This could also gradually start to weigh on a number of services sectors.” Leading labour market indicators painted a mixed picture. Industry further scaled back its hiring plans. By contrast, in the services sectors, except the wholesale and retail trade, and in construction, positive employment plans dominated.

Previous quarters revised

The Federal Statistical Office has conducted an in-depth review of all national accounts calculations and rebased them to the reference year 2015. This has resulted in new rates of change for real GDP as a whole in specific periods. There have also been smaller revisions more recently. Therefore, the quarter-on-quarter results for the first two quarters of 2018 were revised down. In the first quarter, growth consequently totalled 0.1% (down from 0.4%), while it amounted to 0.4% in the second quarter (after 0.5%). The quarter-on-quarter results for the third and fourth quarters of 2018, by contrast, were corrected upwards. They were -0.1% in the third quarter (instead of -0.2%) and 0.2% in the fourth quarter (up from 0.0%). The result for the first quarter of 2019 remained unchanged at 0.4% (all rates seasonally and calendar-adjusted).