German GDP growth stagnated in the final quarter of 2019 in comparison with the third quarter. This is a disappointment as the Federal Statistical Office had forecast a “moderate increase” when it presented its provisional annual results last month.
Investment in machinery & equipment and exports have dropped; protectionism its taking its toll. The falls in this sector were countered by the rise in private and state consumption and construction. Persistently strong domestic demand prevented a fall in the fourth quarter GDP.
The third quarter data was upwardly revised to 0.2 percent from 0.1 percent growth. Nevertheless, because growth in the fourth quarter was 0.1 percentage points softer than expected, the starting position for the 2020 forecast does not change.
The performance of German economy in the first quarter also depends on how the coronavirus affects the Chinese economy and German exports to China. The extension of the Chinese New Year holidays by one week is expected to depress Chinese GDP by 2 percent in the first quarter, even if only half of industrial firms and 10 percent of service firms are assumed to have completely ceased doing business. The fall is expected to be even larger as firms have just moderately ramped up the production this week. This is underpinned by the fact that the traffic volume in most cities is still much lower than usual.
Overall, it is not implausible to assume that the “true” Chinese GDP in the first quarter would be 3 percent lower than in the absence of the coronavirus. Assuming a normal elasticity of 1.5, German exports to China might drop about 5 percent in the first quarter.
“Weighted by the share of China's share in German exports (7 percent), this could well depress German GDP growth in the first quarter by 0.2 percentage points compared with the fourth quarter –especially as some companies could suffer from a lack of deliveries from China”, said Commerzbank in a research report.
There is hope for improvement for the second quarter and beyond. According to WHO, the number of newly infected people in China has been falling for one week and the spread of the coronavirus appears to be abating.
“In the second quarter, Chinese companies should make up for the first quarter production shortfall. The pattern of a weak quarter followed by a strong one was also evident in the SARS epidemic in Hong Kong, whose GDP recovered strongly by 6.1% in the third quarter of 2003, following a 2.4% slump in the previous quarter. The German economy should benefit from this effect in the second quarter through more exports to China, although we expect only an anemic economic upswing thereafter due to the continuing high level of trade policy uncertainty”, added Commerzbank.