KfW Business Cycle Compass Germany: The economic stalemate continues

• KfW Research expects GDP growth of 0.5% for 2019 and 0.9% for 2020 (previous forecast: 0.4% and 0.6%)
• Calendar effect overdraws growth in the coming year; four more working days in 2020 than in 2019
• German economy remains divided: Domestic demand remains strong thanks to construction and consumption, industrial recession continues for now

Cyclical momentum in Germany remains anaemic. In the third quarter, the German economy just barely avoided a technical recession, and growth is set to remain listless at 0.1% in the final quarter of 2019. The economy will remain split through the winter: While domestic demand remains steady, it is still the heavily export-oriented manufacturing industry that is struggling to return to a path of growth. KfW Research expects moderate growth of 0.5% for all of 2019 (previous forecast: 0.4%). For 2020, KfW Research predicts a 0.9% increase in economic output (previous forecast 0.6%).

The higher rate of growth in the coming year, however, is exclusively due to the strong calendar effect. As significantly fewer holidays fall on a weekend in 2020, the year has four more working days than 2019. The additional value added as a result contributes just under 0.4 percentage points to growth. Adjusted for calendar effects, the German economy will therefore expand by a mere 0.5% in 2020 and thus grow at the same weak pace as this year, for which the calendar effect is negligible.

In its economic forecast, KfW Research predicts at least a slight recovery in manufacturing from spring of the coming year. Recent encouraging signals coming from the long-simmering conflicts in the external economic environment give reason to be hopeful. A hard Brexit has become much less likely – even though there is still no clarity as to what will actually happen with regard to the United Kingdom’s departure from the EU in the lead-up to the new elections to the House of Commons scheduled for 12 December 2019. In addition, the trade conflict between the US and China has been somewhat defused by the recently envisaged partial agreement and withdrawal of previous threats to increase tariffs. An agreement would also benefit German industry, which is heavily affected indirectly by this conflict because of its close trade relations with both countries and its focus on particularly cyclical capital goods industries. Whether the current easing of the conflict will continue, however, remains to be seen given the unpredictability of the US administration.

“It is much too early to give the all clear, the threat of recession is not yet over”, commented Dr Fritzi Köhler-Geib, Chief Economist of KfW, on KfW Research’s current economic forecast. “The German economy is and remains vulnerable to negative surprises. The main risk factors are a possible re-escalation of the US-Chinese trade conflict and the residual risk of a disorderly Brexit, but also Italy’s high government debt. What is positive, however, is that the scope of Germany’s fiscal policy enables any damage from recession to be contained.”

The current KfW Business Cycle Compass is available (in German only) at www.kfw.de/konjunkturkompass