German economy sees surprise growth in third quarter
Despite all the talk of a looming recession, the just-released flash estimate of German Q3 GDP growth came in at 0.3% QoQ, down from 0.1% QoQ in second trimester. Over the year, the economy grew by 1.2%. The components of growth will only be released at the end of November, but judging by the available monthly data and the statistical agency’s press releases, growth was mainly driven by private consumption.
Looking ahead, the surprise growth in the third quarter does not mean that the narrative of the recession has changed. All the leading indicators point to a further weakening of the economy in the fourth quarter and there does not seem to be any improvement in sight. Although the weather brought some relief to the German economy, as rainfall raised water levels and warm October weather postponed the start of the heating season, the gradual slide into recession continued. continues. Businesses and households are increasingly suffering from higher energy bills and persistently high inflation, which adjust consumption and investment. The latest government support package, if not implemented retroactively, will be too little too late to prevent a winter recession. It can only mitigate such a recession.
Leaving short-term and cyclical developments aside, we reaffirm again that the German economy is in the midst of a major overhaul. The war in Ukraine probably marked the end of Germany’s very successful economic model: importing cheap (Russian) energy and inputs, while exporting high-quality products to the world, profiting from globalization. The country is now forced to accelerate the green transition, restructure supply chains and prepare for a less globalized world. And these things come on top of well-known, long-standing issues, such as lack of digitization, tired infrastructure and an aging society, to name a few. Compensating factors are the still strong labor market and the government’s willingness and available fiscal firepower to financially support businesses and households facing high energy bills.
Today’s positive growth data is a welcome surprise. However, this does not mean that the German economy will be able to prevent a recession. The recession is only delayed, not reversed.