Tuesday, June 24, 2008

Germany's Economy May Shrink in Q2 2008

Germany's economy may shrink this quarter after expanding 1.5 percent between January and March according to Deputy Economy Minister Walther Otremba today.

Gross domestic product ``may even be negative'' in the three months through the end of June, Otremba told reporters in Berlin. Stagnation ``would be a good result.''

As we saw earlier this morning, German consumer confidence fell to 3.9 from a revised 4.7 in June, the lowest in more than two years.

Asked whether the euro's strength against the U.S. dollar is beneficial as it damps rising oil prices, Otremba said the single currency's gains ``are rather negative overall.'' Still, the euro's effect on oil costs are a ``positive side effect.''

And as may be remembered from the earlier data, the German economy started 2008 with what seemed on the surface to be considerable momentum since with GDP (on a price, seasonal and calendar adjustmented basis) rising by 1.5% in the first quarter over Q4 2007 (or an annualised 6%).

Economic growth in the first quarter was supported primarily by gross fixed capital formation, which continued to increase at a pretty rapid clip. Compared with the fourth quarter of 2007, investment in machinery and equipment was up by 4%, and capital formation in construction rose by even 4.5% owing to the comparatively mild winter.

Overall final consumption expenditure, increased by 0.5%, the first such rise in over a year, however breaking this down we find that government final consumption expenditure was up markedly (+1.3%), while the final consumption expenditure of households showed a smaller increase (+0.3%) against. Inventory building, on the other hand, added a substantial 0.7% points to growth in the first quarter. Exports continued to grow (+2.4%) but in fact since imports rose even more strongly (+3.5%), foreign trade actually had a downward effect on gross domestic product in Q1 2008 when compared with the preceding quarter (see chart below).

But the bottom line was that, when we come to look at the components of growth, of the 1.5% increase in q-o-q GDP, nearly half (0.7% points) was accounted for by a growth in inventories, while 0.4% was accounted for by a growth in construction which was in part the result of better weather in January and February and scheduled work being advanced (although you can't simply add these numbers since some of the construction work may well have accumulated in inventories), while the net impact of external trade slowed, and household consumption only accounted for 0.2% points.

So really at the end of the day it isn't really that surprising that some of this added "bonus" should now be clawed back in Q2, and especially when there is the impact of inflation on consumer purchasing to thing about.

The Federal Statistics Office will publish a report on second-quarter German growth on Aug. 14.

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