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German growth better than expected—so why are analysts worried?

Germany's economic growth slows in second quarter

The German economy grew a better-than-expected 0.4 percent in the second quarter of 2016, according to flash estimates from the country's statistics office, albeit slowing from a 0.7 percent expansion seen in the first quarter of the year.

Gross domestic product (GDP) was supported by a rise in exports and household consumption with the figure beating the consensus forecast in a Reuters poll for 0.2 percent growth. The economy grew 1.8 percent year-on-year in the second quarter.

However, weaker investment in construction and machinery weighed on growth.

According to provisional results from statistics office Destatis, exports were up, while imports were slightly down compared with the first quarter of 2016.

"Both household final consumption expenditure and government final consumption expenditure supported growth," Destatis noted.

"However, growth was slowed by weak gross capital formation. After a strong first quarter, a decline was recorded especially in gross fixed capital formation in machinery and equipment and in construction."

Reasons to be fearful?

Carsten Brzeski, chief economist at ING-DiBa, said that the Germany economy had seen a slowdown "and hardly anyone notices." He believes the latest data could lull policymakers into a false sense of security.

"While at face value the slowdown is mainly the result of technical factors, the underlying trend could soon give reason for concerns," he said.

"All in all, today's GDP data was better than expected. In fact, they were probably too good for policymakers to change the current course and to start tackling weak investments. A risky strategy," he warned.

Brzeski said that although the performance of the German economy since 2009 had been impressive, "the current recovery is clearly running on its very last leg. Ironically, the recovery is currently artificially extended by two – in German public – controversially discussed factors: the ECB's (European Central Bank) loose monetary policy and the influx of refugees. "

"Looking ahead, German growth on the back of domestic drivers should hush often-heard international criticism. However, in the long run, it runs the risk of eating up the economy's growth potential. To sustainably extend the current recovery (or initiate a new cycle), investments will have to pick up," he warned.

"Up to now, investment levels (except for investments in real estate) have hardly picked up, despite low interest rates. Increased uncertainties after the Brexit vote, continued structural weaknesses in many euro zone countries and a renewed global slowdown make an organic pick-up investment rather unlikely. Directly or indirectly, kick-starting investment will require government involvement," he said.

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