MNI 5 THINGS: German GDP Growth Set To Edge Higher In Q2

--German econ remains fundamentally healthy; downside risks mounting

By Jaspreet Sehmi

     LONDON (MNI) - Following the release of disappointing Eurozone-wide

numbers, market attention is focused firmly on Tuesday's release of preliminary

Q2 GDP data from Germany, as concerns mount over whether the bloc is heading for

a less-than-soft landing. The IMF underscored these concerns in a recent report,

noting that while growth in the Eurozone remains solid and broad-based, risks to

the outlook -- stemming from both domestic and global factors -- are

"particularly serious," and have the potential to tip the economy into a hard

landing. Germany is the largest economy in the Eurozone, accounting for almost

30% of the region's total output. On a quarterly basis, German growth halved in

the first quarter to 0.3%, leaving the annual growth rate at 2.3% (down from

2.9% in Q4). Median estimates for Q2 point to a slight pick-up in quarterly

growth to 0.4%, with the annual rate expected to ease further owing to base

effects.

     Ahead of the release, we bring the following points to your attention: 

     Market Expectations Increasingly On The Money: 

     MNI's analysis of actual vs. consensus historical data reveals a relatively

impressive market forecast performance. Indeed, the average forecast

differential over the past decade (i.e. difference between median expectations

and outturns of Q2 GDP q/q growth) has been 0.0pp. Market participants appear to

have particularly honed their forecasting skills more recently, correctly

predicting Q2 growth in three of the last four years. Meanwhile, when the data

has come in stronger or weaker than expected, the maximum miss has been just

0.2pp either way. Overall therefore, our analysis suggests a strong chance of

German q/q GDP growth registering in line with market expectations in Q2.

     The Story So Far: 

     German growth appears to be levelling off following an exceptional 2017,

when the economy expanded by 2.2% -- exceeding the average growth rate of the

prior ten years (1.3%) by almost a whole percentage point. Private consumption

and investment were the main engines of growth, with the former supported by

strong labour market dynamics and the latter by a rebound in exports in the

second half of the year. While recent data shows that growth has clearly peaked,

it looks set to remain solid, supported largely by strong domestic fundamentals

-- including record-low unemployment, subdued inflation, rising wages and

favourable financing conditions. 

     Coincident and Leading Indicators Paint A Picture Of Moderation: 

     Despite a number of downside surprises recently, on balance, coincident and

leading indicators of the German economy support expectations of a soft landing.

Industrial production -- a key coincident variable of German GDP growth --

contracted by 0.9% m/m in June, but expanded by 0.4% q/q over Q2 as a whole,

firming from 0.1% in Q1. Meanwhile, forward-looking indicators suggest that

while further softness is to be expected in H2, the outlook remains

fundamentally solid. Indeed, the expectations component of the German Ifo

Business Climate Index registered in line with its long-run average in July,

while the current conditions component remained near its all-time high. 

     Drivers and Drags: 

     Although the preliminary release does not include a breakdown of GDP by

expenditure components, data released so far suggests that private consumption

and investment were once again the key drivers of quarterly growth. Trade,

meanwhile, was probably a drag in Q2, as import growth looks to have outpaced

that of exports, reflecting both firm domestic demand and the higher cost of

energy imports. 

     Key Risks To The Outlook: 

     Looking ahead, while the balance of risks is tilted to the downside, we

remain relatively optimistic about the outlook for the German economy, and

expect only a moderate slowdown in growth this year. Nevertheless, it is

important to stay mindful of the downside risks, which could lead to a

sharper-than-expected moderation. Ongoing trade tensions remain of particular

concern, given the relative openness of the German economy and the importance of

exports and investment for economic growth.  

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

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