MNI 5 THINGS: Drivers & Drags On The German Economy In Q2

--Private consumption, investment to offset drag from weaker net exports

By Jaspreet Sehmi

     LONDON (MNI) - Ahead of Friday's publication of a detailed breakdown of the

German national accounts data, we recap the key insights from the preliminary

release and look at how each of the main expenditure components of GDP likely

fared in Q2.

     Preliminary Data Shows Growth Gathered Pace In Q2: 

     Preliminary data released last week by the German Federal Statistical

Office (Destatis) showed that German GDP growth edged higher in Q2, coming in at

0.5% q/q, following an upwardly revised 0.4% gain in Q1, and beating market

expectations of a 0.4% rise. On an annual basis, growth slowed very slightly to

2.0% from 2.1% in Q1, reflecting the impact of base effects. This strong outturn

in the Eurozone's largest economy will have no doubt provided a sigh of relief

for ECB policymakers, who have remained resolute regarding their monetary policy

normalisation plans, despite mounting concerns in recent months over whether the

bloc is heading for a less-than-soft landing.

     Consumer Spending (Q2 expected contribution: positive): 

     Private consumption has been a key driver of German economic growth in

recent years, bolstered by record-low unemployment, subdued inflation and rising

wages. With these trends looking set to continue, the outlook for private

consumption remains bright, particularly in an environment in which monetary

policy remains extremely accommodative and is set to be normalised only very

slowly. Meanwhile, a loosening of fiscal policy -- including via planned

increases in state pensions -- is also a supportive factor.

     Government Spending (Q2 expected contribution: positive): 

     Berlin's new grand coalition has outlined a more expansionary course for

fiscal policy over the coming years, a move which is in line with advice from

various international institutions. Indeed, in its recently published 2018

Article IV report on the German economy, the IMF urges German policymakers to

use the country's ample fiscal space to boost growth potential over the

medium-to-longer-term. The Fund notes that the fiscal stimulus measures included

in the government's current budgetary plans should boost GDP by a total of about

0.4 percentage points between 2018 and 2021.

     Business Investment (Q2 expected contribution: positive): 

     Given favourable financing conditions, strengthening consumer spending

levels and intensifying capacity constraints in the manufacturing sector,

business investment looks set to continue to spur headline GDP growth in

2018-19. However, over the longer term, a number of structural factors will

restrain the extent of corporate investment, including a chronic shortage of

skilled labour and concerns over a shrinking domestic market given Germany's

poor demographic outlook. Moreover, the rate of business investment in Germany

compares poorly with its Eurozone peers.

     Net Exports (Q2 expected contribution: negative): 

     Global trade tensions appear to have only marginally affected export

performance so far this year, largely reflecting a still-solid pace of economic

growth in the Eurozone, which is Germany's most significant trading partner.

Import growth -- driven by rising domestic demand and higher energy costs --

looks to have outpaced export growth in Q2, resulting in an overall drag from

net trade. Going forward, the evolution of exports remains sensitive to concerns

regarding U.S.-led protectionism, as well as Brexit-related uncertainties and

turbulence in a number of emerging markets stemming from a stronger dollar and

rising U.S. interest rates. Improved competitiveness, linked to a weakening

trend in the euro since mid-April, is likely to be providing only a partial

offset at best.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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