According to the first official estimate of fourth quarter GDP growth, the German economy narrowly escaped a technical recession at the end of 2018. Growth came in at zero, from minus 0.2% quarter-on-quarter in September. Year-on-year, German GDP growth came in at 0.9%, and 0.6% when adjusted for seasonal effects and working days.
This performance was the result of too many one-offs, surfacing structural weaknesses and external uncertainties. An inexhaustive list could feature: the US-China trade conflict, Brexit, the lack of investment in digital and traditional infrastructure, delays of railways and airlines, and the absence of any significant structural reforms in the last 10 years.
However, it is still not necessarily the end of a long positive cycle. One can still find encouraging signals under the surface of recent macroeconomic data. Economic fundamentals remain solid and, from here on, the chances of a gradual rebound are still much higher than those of another disappointment.
Germany’s labour market is strong, consumers’ willingness to spend is at its highest level since April 2018, order books are still richly filled, and companies’ reports of assured production remain close to record highs. While capacity utilisation has dropped to its lowest level since the third quarter of 2017, the lack of equipment is a more limiting factor to production than the lack of skilled workers. Increases in orders in the automotive industry and improved financing conditions signal solid industrial and investment activity in 2019. Add to these factors the positive fiscal stimulus provided by the government and there is a good counterweight to the latest drop in sentiment. The upside of the data is that things could hardly get worse.
In the meantime, German politics is again becoming interesting. All parties are preparing for the European Parliament elections and state elections for Bremen, both in May. Later this year there will be state elections in Brandenburg and Saxony in September and Thuringia in October.
The European and Bremen elections will be crucial for the federal government, as they will decide the future of the Social Democratic Party (SPD), the coalition’s junior partner. Bremen, which the SPD has ruled since 1946, is its last stronghold. The elections explain the SPD’s energetic efforts to present new policy proposals. Advocating higher pensions, an unconditional minimum pension and further softening of previous labour market reforms illustrates the party’s attempt to move to the political left wing. These proposals will not find easy support from the leading Christian Democratic Union.
The SPD may get positive feedback from voters, or at least party members, for its move to the left. This could precipitate its exit from the government later in the year. The leaders of the three coalition parties (the CDU, its Bavarian sister party the Christian Social Union, and the SPD) met earlier in February for the first time this year. Keeping proceedings quiet after last year’s permanent quarrels seemed to be the highest priority. How long this truce will last is unclear. The coalition collapsing before the official end of its term in 2021 remains possible.
Carsten Brzeski is Chief Economist at ING Germany.