MNI 5 THINGS: Domestic Strength Powers German Economy In Q2

-- Strong domestic dynamics offset external weakness to drive German growth

higher

By Jaspreet Sehmi

     LONDON (MNI) - GDP data released this morning by the German Federal

Statistical Office (Destatis) showed the Eurozone's largest economy growing

strongly in Q2 thanks to buoyant domestic demand, outweighing a drag from net

exports as protectionist clouds gathered. We summarise the key takeaways in the

following five points:

     Overview: Confirming preliminary numbers, today's release showed that

German GDP growth accelerated to 0.5% q/q in Q2, from an upwardly revised 0.4%

gain in Q1. On a year-on-year basis, growth moderated slightly to a still-robust

2.0% from 2.1% in Q1, owing to base effects. Germany's second quarter

performance helped to drive a 0.4% quarterly expansion in the Eurozone. While

the German and wider Eurozone economies have clearly lost momentum following a

stellar 2017, they continue to grow at a healthy clip.

     Drivers: As expected, positive impulses in Q2 came entirely from the

domestic economy. In line with Q1, consumer spending made a 0.2-percentage point

(pp) contribution to headline quarterly growth, while gross fixed capital

formation (business investment) added 0.1pp. Changes in inventories contributed

a further 0.4pp. Both household consumption and investment are benefitting from

subdued inflation as well as accommodative monetary and fiscal conditions.

Government spending had declined in the first quarter due to the deferred

passage of the 2018 budget amid delays in forming a government, but in Q2 public

consumption recovered, growing by 0.6% q/q and adding 0.2pp to headline growth.

Given the new coalition's plans to turn on the spending taps and with parliament

having finally passed the budget bill in early July, official expenditure should

pick up pace in the coming quarters.

     Drags: Net exports shaved 0.4pp from quarterly GDP expansion. While exports

rose by 0.7% over the quarter, imports expanded by 1.7%, with the balance of

trade thus acting as a drag on overall growth. As rising wages and lower

unemployment boost household purchasing power, imports look set for further

solid gains over the second half of the year. The picture for exports is much

less certain as the spectre of U.S.-led trade protectionism hovers menacingly

over the outlook. Brexit-related uncertainties and emerging market turbulence

also threaten to weigh on foreign sales going forward. Net trade could well

continue to provide a drag on economic growth in H2.

     Outlook For Q3: High-frequency data and forward-looking insights from

recent surveys point to German GDP growth remaining robust in the latter half of

this year. The IHS/Markit composite PMI index rose to a six-month high in

August, while the German ZEW survey showed a large boost in investor sentiment

over the month. MNI's analysis suggests that the economy is heading for an

expansion of approximately 0.5% q/q in Q3, in line with Q2's strong showing.

     Short-Term Risks & Medium-Term Picture: Short-term downside risks are

substantial -- a significant rise in global protectionism, a hard Brexit, or an

uptick in sovereign risk in the Eurozone, leading to financial stress, could all

have a deleterious impact on Germany's investment and exports. Over the medium

term, unfavourable demographics and weak productivity dynamics will weigh on

growth in the Eurozone's largest economy.

--MNI London Bureau; +44 207-862-7489; email: ukeditorial@marketnews.com

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

[TOPICS: MAGDS$,M$E$$$,M$G$$$,M$X$$$,M$XDS$]