Quarterly Report Germany IV/2018

QIV-2018 QUARTERLY REPORT GERMANY

German economy shrinks for first time in three years WLTP emissions test curbs vehicle production

▪

Economic output in Germany shrank in the third quarter 2018. Gross domestic product (GDP) nudged down 0.2 percent compared to the previous quarter after price, calendar and seasonal adjustment. The main factor behind the downturn was the drop in vehicle production due to the new emissions testing procedure, which is also affecting supplier industries and car dealers.

▪

Foreign trade also pulled down GDP growth. In the third quarter, exports dropped 0.9 percent over the previous quarter. Imports increased by 1.3 percent over the same period, resulting in a negative contribution to growth.

▪

Companies are still willing to invest. Investment in plant and equipment increased 0.8 percent compared to the previous quarter and construction investment by 0.9 percent. The rise in investment in other assets was lower at 0.2 percent.

▪

We are expecting real economic output to increase 1 ½ percent in the year overall compared to 2017. Calendar adjustment for 2018 is minimal on account of the similar number of working days in both years.

German economy shrinks for first time in three years 20/12/2018

Content The German economy......................................................................................................................... 3 Growth engine splutters ........................................................................................................................ 3 Foreign trade in third quarter: strong demand for imports with marginal rise in exports ...................... 4 Labour market: employment levels continue to rise unabated.............................................................. 6 Industry ................................................................................................................................................ 7 Incoming orders in industry continue to lose steam .............................................................................. 7 Industrial production: vehicle production pulls down third quarter performance ................................... 8 Capacity utilisation drops slightly from a high level ............................................................................. 10 Business climate clouds over further .................................................................................................. 10 Outlook ............................................................................................................................................... 11 Imprint ................................................................................................................................................ 13 Basic data for national accounts ..................................................................................................... 14

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German economy shrinks for first time in three years 20/12/2018

The German economy Growth engine splutters Economic output in Germany has shrunk for the first time in three years compared to the previous quarter. Gross domestic product (GDP) dropped by 0.2 percent in the third quarter 2018 compared to the previous quarter after price, calendar and seasonal adjustment, after increasing by 0.4 percent in the first and 0.5 percent in the second quarter. Year-on-year price-adjusted GDP increased by two percent in the second quarter after calendar adjustment and 1.1 percent in the third quarter (remaining 1.1 percent after calendar adjustment). According to preliminary calculations, the economic output was generated by a workforce of 45.0 million people. That is 556,000 people or 1.3 percent more than one year ago.

Growth in real GDP in percent 4

3 2.2

2.2 1.7

2

1

0

-1 I

II

III

IV

I

2015 change over previous year quarter

II

III 2016

IV

I

II

III 2017

change over previous quarter

IV

I

II

III

IV

2018 change over previous year

Source: Federal Statistical Office

A look at the output side of GDP reveals the cause of the weak economic performance in the third quarter. Apart from agriculture and forestry, gross value added increased in almost all economic sectors compared to one year previously. Only manufacturing recorded decreases, going down 0.1 percentage points year on year, and 1.0 percentage point quarter on quarter. The main factor behind the downturn was the new emissions test procedure for cars that is also affecting all supplier industries and car dealers. It has not, however, stopped the positive trend in employment in the manufacturing sector. In the third quarter 2018, the workforce in this sector was even 134,000 larger than in the same quarter last year. The biggest rise in gross value added was in the construction industry, which grew 4.2 percent. Strong growth in value added was also recorded in information and communications (up 3.1 percent), with a similar rise in the number of workers. Gross value added increased slightly above average in corporate services, retail, transport and hospitality as well as in

3

German economy shrinks for first time in three years 20/12/2018

financial services, going up slightly over one percent in all cases. In financial services, however, the number of workers decreased despite the higher value added.

On the expenditure side of GDP, domestic factors showed a mixed picture. Household consumption expenditure dropped quarter on quarter for the first time since the start of 2015, going down 0.3 percent after price, seasonal and calendar adjustment after having risen 0.3 percent and 0.5 percent over the previous quarter in the two preceding quarters. State consumption expenditure increased by 0.2 percentage points. In sum, consumption dropped compared to the previous quarter for the first time in five years.

Growth momentum came from investment. Gross fixed capital formation increased by 0.8 percent overall compared to the previous quarter. While investment levels in plant and equipment (up 0.8 percent) and buildings (up 0.9 percent) were above average, investment in other assets only increased by 0.2 percent. Including changes in stocks (up 0.7 percentage points), gross investment contributed 0.9 percentage points to growth. Domestic investment contributed 0.8 percentage points to growth.

Net exports pulled down GDP growth considerably in the third quarter 2018. Exports dropped for the second time this year compared to the same quarter last year, falling 0.9 percent. At the same time, imports increased by 1.3 percent compared to the previous quarter. Net exports thus took one percentage point off growth.

Foreign trade in third quarter: strong demand for imports with marginal rise in exports In the third quarter 2018, exports of goods and services increased over the same period last year by a total of 9.2 billion euros or 2.9 percent (country-specific seasonally adjusted data not available). More than two fifths of the increase came from exports destined for euro area countries. The largest nominal growth in exports were those to Ireland, which soared up by 1.63 billion euros or 76.6 percent. Exports to the Netherlands increased by 1.08 billion euros, with those to Italy and Austria growing together by just over one billion euros. Exports also increased strongly to China (up 1.58 billion euros), to the US (up 1.48 billion euros), and to India (up 1.10 billion euros). Among the EU countries outside the euro area, German exports increased the most to Poland (up 1.14 billion euros) and the Czech Republic (up 1.08 million euros). Exports were down to the United Kingdom, dropping by 1.49 billion euros or 7.1 percent in the third quarter, and to Turkey (down 1.12 billion euros or 20.7 percent), and to the United Arabic Emirates (down 696 million euros or 26 percent).

In the third quarter 2018, imports increased by 22.85 billion euros or 8.2 percent compared to the third quarter last year. The strongest growth in nominal terms was in imports from the Netherlands (up 2.82 billion euros or 13.1 percent) and from Belgium (up 2.40 billion euros or 24.5 percent). Imports from Italy also recorded double-digit growth (up 1.81 billion euros or 13.5 percent). Imports from Russia also rose sharply, going up 28.7 percent or two billion euros. Imports from the US (up 9.6 percent) and from China (up 5.4 percent) both rose by around 1.4 billion euros. Imports from Ireland surged up by just over half, amounting to an additional 1.25 billion euros. Imports from Norway (up 1.15 billion euros or 45.9 percent) also soared, although in this case mainly due to the increase in oil prices. Imports only decreased from a few individual countries, including the United Kingdom (down 727 million euros or eight percent) and Singapore (down 356 million euros or 19.3 percent).

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German economy shrinks for first time in three years 20/12/2018

German exports and imports in Q3 2018 in selected countries Year-on-year change increase (+) or decrease (-) in exports in million euros

increase (+) or decrease (-) in imports

in %

Ireland

3 755

+ 1 628

+

76.7

China

23 792

+ 1 581

+

USA

28 834

+ 1 483

Poland

15 998

in million euros

in %

Netherlands

24 380

+ 2 822

+ 13.1

7.1

Belgium

12 211

+ 2 402

+ 24.5

+

5.4

Russia

8 986

+ 2 003

+ 28.7

+ 1 143

+

7.7

Italy

15 226

+ 1 810

+ 13.5

3 596

+ 1 102

+

44.2

USA

16 254

+ 1 429

+

9.6

Netherlands

21 999

+ 1 080

+

5.2

China

27 478

+ 1 406

+

5.4

Czech Republic

11 076

+

984

+

9.8

Poland

13 861

+ 1 324

+ 10.6

Italy

16 217

+

585

+

3.7

Ireland

4 034

+ 1 255

+ 45.1

Japan

5 674

+

459

+

8.8

Norway

3 640

+ 1 146

+ 45.9

Austria

16 071

+

438

+

2.8

Switzerland

11 675

+

857

+

7.9

France

15 835

+

610

+

4.0

India

Qatar

347

-

619

-

64.1

Austria

10 781

+

549

+

5.4

U.A. Emirates

1 982

-

696

-

26.0

Czech Republic

11 369

+

423

+

3.9

Turkey

4 296

- 1 120

-

20.7

19 582

- 1 494

-

7.1

Great Britain

8 391

-

728

-

8.0

325 638

+ 9 206

+

2.9

Total

+ 20 853

+

8.2

Great Britain Total

273 750

Sources: Federal Statisticakl Office, own calculations

The latest figures from October 2018 show exports increasing by 8.5 percent compared to the previous month. Imports rose by slightly more, going up 11.3 percent. In the first ten months of the current year, 4.1 percent more goods and services were exported than in the same period last year. Exports to the euro area went up 5.8 percent, which is somewhat stronger than the growth to EU countries outside the euro area (up 3.5 percent). Exports to countries outside the EU registered a below average increase of 2.8 percent.

In the first ten months of the current year, imports increased by 6.6 percent overall. Germany imported 7.1 percent more goods and services from other EU countries than one year ago. Imports from the euro area increased by 7.8 percent, slightly outpacing imports from EU countries outside the euro area (up 5.7 percent). In the same time period, Germany imported 5.9 percent more goods and services from countries outside the EU.

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German economy shrinks for first time in three years 20/12/2018

Labour market: employment levels continue to rise unabated According to preliminary data from the German Federal Statistical Office, the number of people in employment increased to 45.24 million in October 2018. That means around 559,000 more people (or 1.3 percent) were gainfully employed compared to October last year. The number of jobs subject to social security contributions also increased substantially, with a total of 33.41 million people in such employment in September 2018 (latest available data) according to the latest projections by the German Federal Employment Agency. This represents an increase of 674,000 people or 2.1 percent compared with one year ago.

German labour market* 34

4

33

Unemployed persons (right axis) 3

32

31

2 Employed persons covered by social security (left axis)

30 1 29 2

28 2012

2013

2014

2015

2016

2017

0

2018

Difference in the number of workers making social security contributions from the same month last year (right axis)

*seasonally adjusted in million Source: Federal Employment Agency

The strongest increase in jobs subject to social security contributions in absolute terms was in manufacturing with 155,000 new jobs (up 2.3 percent). Other sectors which recorded a high increase in employment were corporate services (up 89,000 jobs or 3.6 percent) and transportation and storage (76,000 new jobs or 4.3 percent). In nursing and social services, which has always recorded the strongest growth in jobs in absolute terms in the past, jobs increased by 64,000 or 2.8 percent compared to one year ago. Information and communications recorded the most dynamic growth in jobs year on year, rising 5.1 percent. Growth in this sector has remained over four percent consistently for more than two years now. Employment levels dropped in temporary employment agency work (down 60,000 or 6.6 percent) and in financial and insurance services (down 9,000 jobs or 0.9 percent).

In the third quarter 2018, the number of self-employed including contributing family workers went down by 67,000, or 1.6 percent, to 4.25 million. The number of people exclusively in marginal employment decreased by 63,000 or 1.3 percent to 4.71 million in September 2018, according to preliminary figures from the Federal Employment Agency.

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German economy shrinks for first time in three years 20/12/2018

In November 2018, the number of unemployed individuals registered by the Federal Employment Agency dropped to 2.186 million. This represents a decrease of 182,000 people or 7.7 percent without employment year-on-year. The unemployment rate was at five percent in November 2018, according to the Federal Employment Agency. This corresponds to an unemployment rate of 3.3 percent according to the ILO definition.

Industry Incoming orders in industry continue to lose steam In the third quarter 2018, incoming orders in industry decreased by one percent compared to the previous quarter after seasonal and calendar adjustment. For the first time in more than two years, incoming orders were also down year on year, with minus 1.6 percent. Although domestic demand in the third quarter 2018 was 0.9 percent higher than the previous quarter after seasonal and calendar adjustment, it was down year on year for the second quarter in a row, this time by 1.9 percent. Orders from abroad dropped 2.5 percent compared to the previous quarter. Foreign orders were also down year on year, with 1.4 percent less orders from abroad than in the third quarter last year. While demand from the euro area was 2.7 percent lower than in the same period last year, demand from countries outside the EU only dipped slightly (down 0.6 percent).

New orders, manufacturing 114

10 8

110 6 106

4

1.1

102

2 0

98 -1.4

-1.0

-2

-2.5 94

-4 2015

2016

2017

2018

Change over previous year, two-month-average, in percent (right axis) Volume index in manufacturing, two-month-average, seasonally adjusted (left axis) Change over previous quarter (q-o-q), in percent Source: Federal Statistical Office

Among the main groups of industrial goods, producers of intermediate goods recorded 1.6 percent less orders in the third quarter 2018 compared to the previous quarter. While domestic demand nudged

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German economy shrinks for first time in three years 20/12/2018

up by 0.2 percent, demand from abroad fell by a hefty 3.4 percent. Year-on-year, incoming orders for intermediate goods was down by 1.4 percent which is the first drop for this sector in three years.

Demand for capital goods dropped marginally, going down by 0.8 percent. Domestic demand for capital goods actually increased by 2.5 percent compared to the second quarter. In the same period, orders from abroad decreased by 2.6 percent. Year on year, demand for capital goods decreased by two percent in the third quarter.

Consumption goods producers registered almost the same number of orders in the third quarter as in the second quarter 2018 (down 0.2 percent). Domestic demand fell substantially, going down by 4.8 percent, while orders from abroad increased by 3.2 percent. Compared to last year, orders for consumption goods producers increased by 0.8 percent.

In October 2018, the latest available figures, incoming orders increased by 0.3 percent compared to the previous month after price, calendar and seasonal adjustment according to preliminary data. The figures for September 2018 were downwardly adjusted, down to an increase of 0.1 percent. While domestic demand registered a decrease of 3.2 percent, orders from abroad were 2.9 percent higher than in September. Demand from the euro area increased by a very robust 7.3 percent compared to the previous month. Orders from countries outside the EU only increased by a marginal 0.3 percent.

The upward trend in incoming orders for industry in the course of the year has risen less dynamically than last year. Broken down by origin, domestic and euro area orders were somewhat weaker than orders from non-EU countries. In view of the persistently high levels of capacity utilisation in industry, companies should have succeeded in working off some of their order backlog. Order books still appear to be well filled, with the reach of orders on hand staying steady between January and September 2018 and now extending far into 2019, according to figures from the Federal Statistical Office.

Industrial production: vehicle production pulls down third quarter performance Production sector output dropped by 0.9 percent in the third quarter 2018 compared to the previous quarter after seasonal and calendar adjustment. While output in energy and construction increased, production in the manufacturing sector dropped by 1.4 percent in the third quarter 2018 compared to the previous quarter. This was the first drop after a period of eight quarters of uninterrupted growth.

Output in the third quarter 2018 was nonetheless up by 0.3 percent over the third quarter last year.

This is a good result not just in view of the decrease in vehicle production, it is also the eleventh consecutive quarter of year-on-year growth.

The main groups of industrial goods registered the following production levels in the third quarter 2018: the production of consumer goods increased by 5.3 percent. Producers of intermediate and capital goods produced just slightly less year on year (down 0.7 percent and 0.8 percent respectively).

The most recent figures for production levels are relatively weak. After a slight increase in September of 0.1 percent, output in the production sector decreased by 0.5 percent in October 2018 compared to the previous month following price, calendar and seasonal adjustment, according to preliminary data from the Federal Statistical Office. Energy production fell 3.2 percent. Activity in the construction industry was also slightly down. Industrial production decreased by 0.5 percent overall. The production of capital goods increased by 0.3 percent and the production of intermediate goods by 0.2 percent, while the production of consumer goods decreased by a substantial 3.3 percent.

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German economy shrinks for first time in three years 20/12/2018

Production development in the manufacturing industry year on year change in percent 2016 2017 2017 2018 year Q4 Q1 Q2 original value calendar adjusted

Q3

compared to previous period in percent 2018 Q1 Q2 Q3 Sept.

Oct. seasonally and calendar adjusted

Production

2.0

2.7

4.7

3.9

2.9

0.8

0.1

0.7

-0.7

0.1

-0.5

Industry

1.5

2.9

5.3

4.3

3.5

0.2

0.2

0.4

-1.2

0.0

-0.5

Intermediat goods

1.2

3.5

6.2

3.8

2.4

-0.6

-0.9

-0.1

-0.8

-0.5

0.2

Capital goods

1.8

2.9

5.4

4.3

3.5

-0.9

0.2

0.6

-2.2

0.4

0.3

Consumer goods

1.6

1.9

3.2

4.8

5.7

5.4

2.0

1.8

0.9

-0.2

-3.2

-1.2

-0.1

0.3

0.7

-3.5

1.0

-1.2

-1.5

2.2

-5.5

-3.2

Construction industry

5.9

2.3

3.3

3.5

2.2

3.6

0.4

2.6

0.8

3.0

-0.3

Construction industry proper

3.6

5.2

5.0

4.7

4.7

5.2

1.3

5.8

-0.1

4.1

-1.9

Energy

Sources: Federal Statistical Office, own calculations

Since the turn of the year 2017/2018, production levels in industry have steadily lost steam. In view of the robust production data in the first half of the year, we are nonetheless still expecting production for the year overall to be around 2.5 percent higher than last year.

Production, manufacturing 110

8 7

108

6 106

5 4

104

3 102

2 0.9

100

0.2

1

0.6

0 98

-1.4

96

-1 -2

2015

2016

2017

2018

Change over previous year, two-month-comparison, in percent (right axis) Volume index in manufacturing, two-month-average, seasonally adjusted (left axis) Change over previous quarter (q-o-q), in percent Source: Federal Statistical Office

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German economy shrinks for first time in three years 20/12/2018

Capacity utilisation drops slightly from a high level The weak trend in production is also reflected in a slightly lower capacity utilisation rate. In the fourth quarter 2018, the capacity utilisation rate in industry dropped slightly for the third quarter in a row, going down to 87.1 percent. This is still a very high level and 3.9 percentage points higher than the average rate over the last ten years. The order backlog for industry decreased slightly once again in the fourth quarter 2018, but at an average of 3.4 production months it is still only just under the all-time record of 3.5 production months set at the beginning of 2018.

Business climate clouds over further Sentiment in trade and industry has clouded over further according to ifo Institute data. The ifo business climate index registered its third consecutive drop in November 2018. Companies in almost all sectors were less optimistic both about their current situation and the upcoming six months. Service providers were slightly less enthusiastic about their business prospects but rated their current

ifo Business-Cycle Clock German manufacturing* Boom

Business expectations for the next six month

Upswing 25 Jan 2014

Jan 2011

Jan 2018

15 Jan 2017

Jan 2010 5

Jan 2016 Jan 2015

-5

November 2018

Jan 2012

Jan 2013

-15

-25

Downswing

Recession -30

-20

-10

* Balances seasonally adjusted

0

10

20

30

40

50

60

Assesment of current business situation

Source: ifo Institut

business situation as slightly improved. The index for wholesale and retail also dropped, with both components down overall compared to October although the individual sectors trended divergently.

The business climate among wholesalers deteriorated, while improving significantly in retail. After four increases in a row, the construction industry was unable to continue its record-breaking path.

Companies here were slightly less enthusiastic about their current situation and the next six months.

In manufacturing, the business climate index dropped for the third consecutive time in November, which is also the ninth time this year. Only a few companies in the sector are still expecting the next six months to bring an improvement. The number of companies that view their current situation as good or very good has also dropped further. The only bright spot here was the export prospects of industry, which improved slightly in November.

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German economy shrinks for first time in three years 20/12/2018

Outlook Economic growth took some time out in the third quarter. Exports were weak and vehicle production slumped due to the new emissions testing procedure WLTP. GDP was down quarter on quarter after price, seasonal and calendar adjustment for the first time after thirteen quarters of uninterrupted growth. Although we expect the German economy to return to an upward trend in the fourth quarter 2018, we need to revise our growth forecast for the year 2018 overall once again on account of the weak third quarter performance.

Among the domestic factors, we need to slightly revise our forecast for consumption. Employment is still rising, above all with more jobs subject to social security contributions, generating additional income. Private purchasing power is also likely to increase on the back of the salary and wage increases agreed in the recent collective wage negotiations. However, the higher energy prices are chipping away at the real purchasing power of consumers. We therefore expect private consumption expenditure this year to increase by only 1 ¼ percent rather than the 1.5 percent anticipated so far.

Regarding state consumption expenditure, based on the figures for the first three quarters, we still expect an increase for the year overall of 1 ½ percent. This would result in an increase in consumption expenditure of 1.3 percent.

BDI forecast for 2017/18: Change in real economic output over the previous year in percent Actual figures 2017

2018

Federal Government 2018

European Commission 2018

GDP, real

2.2

1½

2.4

1.7

Consumption

1.7

1.3

-

-

-Private Consumption

1.8

1¼

1.9

1.6

-Public Consumption

1.6

1½

1.8

1.3

2.9

3.3

3.8

3.1

- Machinery and Equipment

3.7

5.0

5.0

4.7

- Construction

2.9

3.0

2.8

-

- Other

1.3

1.0

4.2

-

Exports

4.6

3.0

5.3

2.8

Imports

4.8

4.0

5.8

3.3

Net Exports, Economic Output

0.2

-0.2

0.2

0.0

Investment

BDI

Sources: Federal Statistical Office, Federal Government, European Commission (Nov. 2018), own calculations

11

German economy shrinks for first time in three years 20/12/2018

Investment activity has not been quite as strong as we expected back in September. The strongest correction is needed in investment in other assets (software, research and development). Investment levels here have hardly grown in the course of the year so far, so the increase in investment will not be more than one percent. We expect investment in plant and equipment to increase by only five percent, which is one percentage point less than we had anticipated in September 2018. We still anticipate investment levels in construction to increase by three percent for the year overall.

Construction output is still pointing up but will soon reach its short-term capacity limits.

Our assessment of the trend in foreign trade has changed slightly since September. We expect exports of German goods and services to increase by only three percent due to the weaker level of global economic activity. Regarding imports, we are still expecting an increase of four percent here, as we did in September. On account of the weaker development in exports, net exports are now likely to make a negative contribution to growth this year.

Overall, we have downwardly revised our forecast for real economic growth down to only 1 ½ percent compared to last year. No calendar adjustment is necessary due to the almost equal number of working days this year compared to last year.

12

German economy shrinks for first time in three years 20/12/2018

Imprint Bundesverband der Deutschen Industrie e.V. (BDI) Breite Straße 29 10178 Berlin T: +49 30 2028-0 www.bdi.eu Author Thomas Hüne T: +49 30 2028-1592 t.huene@bdi.eu Editorial/Graphics Dr. Klaus Günter Deutsch T: +49 30 2028-1591 k.deutsch@bdi.eu Marta Gancarek T: +49 30 2028-1588 m.gancarek@bdi.eu

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German economy shrinks for first time in three years 20/12/2018

Basic data for national accounts GDP (price, seasonally and calendar adjusted) Change over previous period in percent 2017 2016

2018

2017

Q3

Q4

Q1

Q2

Q3

2.6

1.7

0.1

0.3

0.2

0.5

-0.1

-Private Consumption

2.1

1.8

0.1

0.2

0.5

0.3

-0.3

-Public Consumption

4.0

1.6

0.3

0.4

-0.5

0.8

0.2

3.5

2.9

0.4

0.3

1.4

0.5

0.8

-Machinery and Equipment

2.2

3.7

1.2

0.5

2.1

0.1

0.8

-Construction

3.8

2.9

-0.1

0.2

1.6

0.9

0.9

-Other

5.2

1.3

0.2

0.4

-0.5

0.3

0.2

Domestic Demand

3.0

2.0

0.3

0.3

0.4

0.7

0.8

Exports

2.3

4.6

1.2

1.7

-0.3

0.8

-0.9

Imports

4.1

4.8

0.5

1.4

-0.3

1.5

1.3

Total

2.2

2.2

0.6

0.5

0.4

0.5

-0.2

Consumption

Investment

Contribution to growth (in percentage points) Consumption

1.9

1.2

0.1

0.2

0.2

0.3

-0.1

-Private Consumption

1.1

0.9

0.0

0.1

0.3

0.2

-0.1

-Public Consumption

0.8

0.3

0.1

0.1

-0.1

0.2

0.0

0.7

0.6

0.1

0.1

0.3

0.1

0.2

-Machinery and Equipment

0.2

0.2

0.1

0.0

0.1

0.0

0.1

-Construction

0.4

0.3

0.0

0.0

0.2

0.1

0.1

-Other

0.2

0.1

0.0

0.0

0.0

0.0

0.0

Change in stocks and the like

0.2

0.1

0.1

0.0

-0.1

0.2

0.7

Domestic Demand

2.7

1.9

0.2

0.3

0.4

0.7

0.8

-0.5

0.3

0.4

0.2

0.0

-0.2

-1.0

Investment

Net exports

Source: Destatis

14