KfW Business Cycle Compass Germany: potential growth is forecast, but not more

• After a very disappointing third quarter, KfW Research expects a noticeable rebound in economic growth towards the end of the year
• But the annual growth rate will no longer go beyond potential growth
• KfW Research revises economic forecast for 2018 downward to 1.6% (previous forecast: 1.8%) and confirms forecast of 1.6% for 2019

After a deeply disappointing third quarter, in which growth was actually slightly negative at -0.2%, KfW Research expects the German economy to rebound sharply in the short term towards the end of the year. Germany’s gross domestic product – adjusted for price, seasonal and calendar variations – is set to grow by a strong 0.8% in the fourth quarter. But even with such a year-end rebound, real growth for 2018 will not exceed the potential growth rate. KfW Research has therefore revised its economic forecast for 2018 downward to 1.6% (previous forecast: 1.8%). Growth next year will probably continue around the rate of its production potential. KfW Research confirms its previous forecast of 1.6% for 2019.

The unexpected setback for the German economy in the third quarter is due in large part to production cuts in the automotive industry, where output from July to September was 7.4% lower than in the preceding quarter. The decline was probably caused mainly by problems in the certification of vehicles to the new EU-wide emissions testing standard WLTP (Worldwide Harmonised Light Vehicle Test Procedure). These problems weighed not just on the actual production of motor vehicles but also on private consumption and exports, because as of September all new vehicles sold within the EU must be WLTP certified. This has probably put a dampener even on investments, as businesses’ capital formation in machinery and equipment includes the acquisition of vehicles. The fact that investment in the third quarter increased not just in construction but also in machinery and equipment despite this burden indicates continuing basic confidence in the future.

“The contraction of the German economy in the summer will remain an outlier. This is suggested not just by higher investment but by the relatively vigorous growth of imports, which points to a consistently strong underlying momentum of domestic demand”, said Dr Jörg Zeuner, Chief Economist of KfW Group. “The final quarter is set to see a noticeable rebound, but no return to lasting high quarterly growth rates beyond that. The very strong business cycle which peaked in 2017 is cooling down.” The growth in gross domestic product will be more or less in line with the typical estimates of Germany’s growth potential this year and next. “We will not see more than 1.6% in 2019 either. But since Germany’s upturn has already been running for nine years straight, this is actually good for its chances of survival because capacities are already fairly tight, especially in the labour market”, said Zeuner.

The forecast is subject to a number of downward risks. These include US protectionism and its various facets such as the escalation of the trade conflict with China and the ongoing general threat of punitive tariffs on European products such as cars, as well as Italy’s confrontation course on fiscal policy and Brexit, which are causing great concern. Should at least some of these risks materialise in the coming year, Germany’s growth in 2019 would probably turn out significantly lower.

The current KfW Business Cycle Compass is available at:
www.kfw.de/konjunkturkompass