Quarterly Report Germany I/2019

QI-2019 QUARTERLY REPORT GERMANY

Economic outlook for 2019: domestically strong but externally weak German economic output to increase by only 1.2 percent

▪

Real economic output is expected to rise by just 1.2 percent this year.

Growth momentum is thus set to slow down further, due mainly to external economic factors.

▪

Disruptions in foreign trade with the United Kingdom and the United States could bring economic growth dangerously close to zero.

▪

The German economy just managed to avoid slipping into recession in the second half of 2018. GDP (price, calendar and seasonally adjusted) stagnated towards the end of the year, after dropping 0.2 percent in the third quarter. With a growth rate of only 1.4 percent for the year, the German economy has slowed down considerably compared to the two previous years.

▪

The prospects for the domestic economy remain positive for the year ahead. The number of jobs subject to social security contributions is still rising and the latest wage agreements include considerable increases.

Both factors will help keep private consumption stable.

▪

The investment cycle is not over yet. We expect investment in plant and equipment to increase by 2.5 percent. Investment in construction should be slightly stronger still, at around three percent.

▪

Foreign trade is expected to pull down growth. Exports are set to rise by a very moderate 1.5 percent. With imports looking to grow a lot more, net exports will be negative.

Economic outlook for 2019: domestically strong but externally weak 20/03/2019

Content The German economy......................................................................................................................... 3 German economy slows down considerably ......................................................................................... 3 Foreign trade sees strong rise in imports in the fourth quarter ............................................................. 4 Labour market: job creation continues unabated .................................................................................. 6 Industry ................................................................................................................................................ 7 Incoming orders in industry: moderate rise at the end of the year ........................................................ 7 Industrial production in 2018: weak second half pulls down annual performance ................................ 8 Capacity utilisation still above long-term average ............................................................................... 10 Subdued prospects for 2019 ............................................................................................................... 10 Business climate index falling and falling and falling .......................................................................... 11 Outlook ............................................................................................................................................... 12 Sources .............................................................................................................................................. 15 Imprint ................................................................................................................................................ 15 Basic data for national accounts ..................................................................................................... 16

2

Economic outlook for 2019: domestically strong but externally weak 20/03/2019

The German economy German economy slows down considerably The German economy just avoided slipping into a recession in the second half of the year 2018. Gross domestic product (GDP) stagnated in the fourth quarter 2018 compared to the previous quarter and following price, calendar and seasonal adjustment. This was preceded by a drop of 0.2 percent in the third quarter 2018. Year on year, real GDP increased by 1.1 percent in the third quarter and 0.9 percent in the fourth quarter. Fourth quarter economic output was generated by a workforce of 45.2 million employees. That is 507,000 people or 1.1 percent more than one year ago.

Growth in real GDP in percent 4

3 2.2 2

2.2

1.7

1.4

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

Due to the weak fourth quarter, the Federal Statistical Office has made a slight downward adjustment to the annual result for German GDP published in January. With an annual growth rate of now 1.4 percent (1.5 percent following calendar adjustment) the German economy grew considerably slower last year than in the two previous years.

Closer examination of the output side of GDP shows that gross value added increased in almost all sectors of the service industry compared to the year before. The construction industry recorded the strongest increase, with gross value added going up 4.4 percent and 38,000 additional jobs. The information and communications sector also grew vigorously, with gross value added and the number of workers both going up by 3.4 percent. Retail, transport and hospitality, and public service providers in the education and healthcare sector both recorded an above-average increase in gross value added, going up by two percent and 1.6 percent respectively. Jobs in the latter sector also increased, going up by 179,000. The number of workers in retail, transport and hospitality rose by a more modest 89,000.

Gross value added in manufacturing continued its downward trend from the third quarter, but with a

3

Economic outlook for 2019: domestically strong but externally weak 20/03/2019

considerably more pronounced drop of 1.4 percent. Drops in the production of vehicles due to the new emissions testing procedure WLTP as well as low water levels in some waterways are likely to have curbed production in individual industries. In contrast to agriculture and forestry, the reduction in gross value added did not lead to a decrease in the number of jobs.

On the expenditure side of GDP, growth momentum in the fourth quarter 2018 came almost exclusively from domestic activity. Private consumption expenditure in the fourth quarter increased by one percent in real terms compared to the fourth quarter 2017. Consumers increased their spending on hotel and catering services, leisure, entertainment and culture, and furniture and household appliances by well over two percent in each of these sectors. Expenditure on communications, clothing and shoes, on the other hand, dropped. State consumption expenditure went up by a considerable 1.8 percent.

Overall, consumption contributed 0.9 percentage points to growth.

Gross fixed capital formation increased by three percent in the fourth quarter, which is close to the average growth seen in the last five years. While investment in both plant and equipment and in construction increased robustly, going up by 3.5 percent and four percent respectively, investment in other assets slowed down considerably, going up just 0.5 percent. Including changes in stocks, which contributed 0.5 percentage points to growth, gross capital expenditures contributed 1.2 percent to growth. Exports only grew by 0.4 percent over last year following price adjustment. Imports outpaced exports considerably, rising by 3.2 percent in the same period. Foreign trade thus once again, as in the third quarter, pulled down quarterly growth considerably, this time by 1.1 percentage points.

Foreign trade sees strong rise in imports in the fourth quarter In the fourth quarter 2018, exports of goods and services increased a lot less than the annual average of three percent, rising by only 1.6 percent (country-specific seasonally adjusted data not available).

Among Germany’s trading partners within the euro area, exports to Italy increased by 1.24 billion euros and to the Netherlands by 984 million euros. Exports to EU countries outside the euro area also increased considerably. Exports to Poland were up 928 million euros, to the Czech Republic by 620 million euros and to Hungary by 332 million euros. Exports to China increased by 1.2 billion euros, or 5.3 percent, in the fourth quarter. Exports to Vietnam, India, Japan and Mexico all increased by more than 300 million euros. In contrast, exports to Turkey slumped by 1.61 billion euros, or just over 29 percent. Exports to France (down 580 million euros) and Sweden (down 546 million euros) and to the United Kingdom (down 891 million euros) all dropped considerably.

In the fourth quarter 2018, Germany saw a strong increase in imports compared to the same period last year, with a rise of 12.8 billion euros or 4.9 percent. The strongest growth in nominal terms was in imports from China (up 1.78 billion euros or 6.6 percent), followed by imports from the Netherlands which increased by 1.66 billion euros (up seven percent) and Russia, which rose by 1.40 billion euros or 17.2 percent. Imports from Belgium (up 1.37 billion euros) and Poland (up 1.06 billion euros) also rose significantly. Imports from South Africa (up 796 million euros) increased by almost 50 percent and from South Korea (up 674 million euros) by 25 percent. Imports from Nigeria almost doubled, going up by 347 million euros. Imports from Mexico dropped by 486 million euros or 21.6 percent, and from Kazakhstan by 347 million euros, which is more than one third.

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Economic outlook for 2019: domestically strong but externally weak 20/03/2019

German exports and imports in Q4 2018 in selected countries Year-on-year change increase (+) or decrease (-) in exports in million euros

increase (+) or decrease (-) in imports in %

in million euros

in %

Italy

18 026

+ 1 244

+

7.4

China

28 635

+ 1 779

+

6.6

China

24 029

+ 1 200

+

5.3

Netherlands

25 511

+ 1 661

+

7.0

Netherlands

23 059

+

984

+

4.5

Russia

9 516

+ 1 395

+ 17.2

Poland

16 250

+

928

+

6.1

Belgium

11 256

+ 1 372

+ 13.9

Czech Republic

11 192

+

620

+

5.9

Poland

14 481

+ 1 057

+

Vietnam

1 596

+

350

+

28.1

2 412

+

796

+ 49.3

Austria

16 339

+

348

+

2.2

USA

16 339

+

786

+

Hungary

6 400

+

332

+

5.5

South Korea

3 368

+

674

+ 25.0

India

3 200

+

318

+

11.0

Czech Rpublic

12 391

+

585

+

5.0

Japan

5 140

+

311

+

6.4

Austria

10 854

+

557

+

5.4

Mexico

3 537

+

303

+

9.4

Switzerland

11 693

+

540

+

4.8

Nigeria

737

+

347

+ 88.8

Finland

2 217

+

291

+ 15.1

557

-

347

-

38.4

1 766

-

486

-

21.6

+ 12 822

+

4.9

Sweden

6 465

-

546

-

7.8

France

20 054

-

580

-

2.2

Great Britain

19 726

-

891

-

4.3

3 978

- 1 610

-

28.8

329 874

+ 5 084

+

1.6

Turkey Total

South Africa

Kazakhstan Mexico Total

276 235

7.9

5.1

Sources: Federal Statistical Office, own calculations

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Economic outlook for 2019: domestically strong but externally weak 20/03/2019

Labour market: job creation continues unabated According to preliminary data from the German Federal Statistical Office, the number of people in employment increased to 44.79 million in January 2019. That means around 477,000 more people (or 1.1 percent) were gainfully employed compared to January last year. The number of jobs subject to social security contributions continued to rise, with a total of 33.32 million people in such employment in December 2018 (latest available data) according to the latest projections by the German Federal Employment Agency. This represents year-on-year increase of 707,800 people or 2.2 percent.

German labour market* 33

4 Unemployed persons (right axis)

32 3 31 2 30

Employed persons covered by social security (left axis) 1

29

28 2012

2013

2014

2015

2016

2017

201

2 0 2019

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

Job numbers increased in almost all economic sectors compared to the previous year. The strongest increase in employment in absolute terms was recorded in the metal, electrical and steel industry, where the number of jobs increased by 126,000 or 2.8 percent, and in skilled corporate services, which saw an increase of 88,000 or 3.6 percent. Transportation and storage registered an increase of 73,000 jobs or 4.1 percent. In construction, jobs increased by 61,000. Employment levels dropped in temporary employment agency work (down 93,000 or minus 10.7 percent) and in financial and insurance services (down 7,000 or minus 0.8 percent).

Other forms of employment decreased compared to one year previously. The number of selfemployed including contributing family members went down by 82,000 or 1.9 percent in the fourth quarter 2018, dropping to 4.16 million. The number of people exclusively in marginal employment decreased by 77,000 or 1.6 percent to 4.65 million in December 2018, according to preliminary figures.

In February 2019, the number of unemployed individuals registered by the Federal Employment Agency was 2.37 million. This represents a decrease of 173,000 people or 6.8 percent without employment year-on-year. The unemployment rate was at five percent in February 2019, according

6

Economic outlook for 2019: domestically strong but externally weak 20/03/2019

to the Federal Employment Agency. This corresponds to an unemployment rate of 3.2 percent according to the ILO definition.

Industry Incoming orders in industry: moderate rise at the end of the year In December 2018, incoming orders for German industry increased by 0.9 percent over the previous month after price, seasonal and calendar adjustment. Domestic orders increased by 0.5 percent compared to the previous month, following an increase of three percent in November. Orders from abroad rose by 1.4 percent in December. While orders from the euro area increased substantially (up four percent), countries outside the euro area slightly reduced their orders for industrial goods (down 0.2 percent).

New orders, manufacturing 114

9 7

110 5 106

3 1.2 1

102

-1 -1.4

98

-1.0 -2.0

-3

94

-5 2015

2016

2017

2018

2019

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

The less volatile quarterly comparison shows that the fourth quarter 2018 registered an increase in orders (1.2 percent) over the previous quarter for the first time that year. Domestic demand dropped by 0.7 percent but orders from the euro area and beyond both increased by 2.5 percent.

Among the main groups of industrial goods, producers of intermediate goods recorded three percent less orders in the fourth quarter 2018 compared to the previous quarter, the steepest drop in eight years. Domestic demand decreased by 3.3 percent, slightly more than the drop in foreign demand (down 2.7 percent).

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Economic outlook for 2019: domestically strong but externally weak 20/03/2019

Demand for capital goods in the fourth quarter 2018 increased by 4.1 percent over the previous quarter. This was the first quarter-on-quarter growth registered that year. Demand from abroad far outpaced domestic demand, going up 5.7 percent and 1.3 percent respectively. It was the year’s second consecutive quarter of growth in demand from domestic companies, and the first quarter of growth in foreign demand.

Orders received by consumption goods producers decreased slightly compared to the third quarter 2018, dropping by 0.8 percent. The result was not just negative quarter-on-quarter but also year-on year for the first time since 2016. While domestic demand rose moderately (up 1.2 percent), demand from abroad dropped by 2.1 percent.

After a promising start to the year, incoming orders proved disappointing over the further course of 2018. At the turn of the year, domestic demand had already ebbed off slightly over the previous month.

A few months down the line, demand from abroad also started flagging. However, as both domestic and foreign demand had been at a very high level, the result for the year as a whole still just remained in positive territory compared to the previous year. For 2018 overall, the 1.3 percent increase in incoming orders from abroad (euro area: up 0.2 percent; countries outside the euro area: up 1.9 percent) was cancelled out by the downward trend in domestic demand (down 1.5 percent).

Industrial production in 2018: weak second half pulls down annual performance Output in the production sector increased by 0.8 percent in December 2018 compared to the previous month following price, calendar and seasonal adjustment. This was the first increase following three consecutive months on a downward trend. While output in energy and construction stagnated, industrial production increased by one percent. Capital goods producers increased their production by 1.8 percent in December, the producers of intermediate goods by 0.5 percent. The production of consumer goods dropped by 0.5 percent.

The December figures now available complete the picture for the fourth quarter 2018. The production sector recorded a 1.1 percent decline over the previous quarter, following a drop of 1.7 percent in the third quarter. While energy production fell substantially, going down 4.7 percent, the dip in construction activity was moderate at only 0.8 percent. Industrial production suffered a drop of 1.1 percent compared to the previous quarter and 2.3 percent compared to the previous year. Among the main groups of industrial goods the production of consumer goods registered an unexpected drop of 5.7 percent compared to the previous quarter, going down for the first time since summer 2016. The production of intermediate goods dropped by a much more moderate 0.7 percent. Capital goods producers went against the tide, managing to nudge output up by 0.2 percent.

In autumn, all indicators still seemed to confirm our forecast that production would increase by 2.5 percent in 2018 overall (Industry Report I/2018 and II/2018). The drop in vehicle production on account of the new emissions testing procedure, however, turned out to be more persistent than initially expected.

Furthermore, production in some industries was affected by low water levels. The increase in production of 1.2 percent compared to the previous year is therefore well below our growth forecast.

Among the main groups of industrial goods, consumer goods producers still managed to record an increase of 3.1 percent compared to 2017.

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Economic outlook for 2019: domestically strong but externally weak 20/03/2019

Production development in the manufacturing industry compared to previous period in percent 2018 Q2 Q3 Q4 Oct. Nov. Dec. seasonally and calendar adjusted

year on year change in percent 2017 2018 2018 year Q2 Q3 Q4 original value calendar adjusted Production

2.7

0.9

2.9

-0.2

-2.1

0.6

-1.7

-1.1

-0.7

-1.3

0.8

Industry

2.9

1.2

3.5

-0.2

-2.3

0.3

-1.6

-1.1

-0.5

-1.5

1.0

Intermediat goods

3.5

0.6

2.4

-0.6

-2.7

-0.3

-0.9

-0.7

-0.1

-0.6

0.5

Capital goods

2.9

0.9

3.5

-1.5

-1.9

0.6

-2.8

0.2

0.1

-1.3

1.8

Consumer goods

1.9

3.1

5.7

4.5

-2.1

1.7

0.2

-5.7

-3.3

-4.0

-0.5

-0.1

-1.8

-3.5

0.9

-5.2

-1.5

2.1

-4.7

-2.2

0.2

0.0

Construction industry

2.3

0.6

2.2

-1.0

-0.2

2.6

-3.9

-0.8

-1.2

-0.5

0.0

Construction industry proper

5.2

5.5

4.7

5.2

5.7

5.8

-0.1

-1.0

-2.0

-0.9

-1.4

Energy

Sources: Federal Statistical Office, own calculations

Manufacturers of intermediate goods only saw production rise by 0.6 percent – much less than the previous year when a 3.5 percent rise was registered. Capital goods producers were also unable to match their expansion of the previous year, growing by only 0.9 percent compared to 2.9 percent in 2017.

Production, manufacturing 110

8

108

6

106

4

104 2 102

0.3 0

100 -1.1 98

-1.0

-1.6

96

-2 -4

2015

2016

2017

2018

2019

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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Economic outlook for 2019: domestically strong but externally weak 20/03/2019

Capacity utilisation still above long-term average The weaker trend in industrial production that commenced in the second half of 2018, was accompanied by decreasing capacity utilisation. The capacity utilisation rate in manufacturing dropped by 0.8 percentage points at the beginning of the current year down to 86.3 percent, according to figures from the ifo Institute. Compared to the same time last year, capacity utilisation was down by 1.8 percentage points. That said, capacity utilisation of production facilities is still 3.1 percentage points higher than the average rate over the last ten years. If food, beverages and tobacco are excluded from the calculation, the utilisation rate in industry is even slightly higher at 86.7 percent. This figure is 3.2 percentage points higher than the average rate over the last ten years.

The average order backlog for industry in general is currently 3.2 production months, and thus still above the long-term average of 2.8 months. But this figure has dropped in comparison to last year.

Among the main groups of industrial goods, the producers of intermediate goods had an order backlog of 2.9 production months. Consumption goods producers had an order backlog of 1.8 production months. The producers of capital goods had an order backlog of four months. That is the lowest level since the fourth quarter 2017.

Subdued prospects for 2019 Unlike last year, manufacturing in all main industrial groups started out the new year with a negative carry-over effect. If production stagnates at the fourth quarter level, this would lead to a decline in production of 1.5 percent for the year as a whole. The negative carry-over for producers of intermediate inputs and capital goods is one and 1.1 percent respectively. Consumer goods producers started out 2019 with a negative carry-over of 3.8 percent on account of their extremely weak fourth quarter performance.

Industrial activity lost steam substantially in the second half of 2018. Alongside one-off effects in individual industries, this is likely to be due to the global economic slowdown. While incoming orders no longer match the volume generated until the end of 2017, latest figures indicate that they may be bottoming out. The drop has flattened out since the middle of 2018. The manufacturing purchasing managers’ index, however, is worrying as it has fallen twice in a row and is now standing at below the threshold of 50 index points, thus indicating contraction. However, the high capacity utilisation rate, which remains well above average, and comparably high order backlogs in manufacturing suggest an economic dip rather than a recession.

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Economic outlook for 2019: domestically strong but externally weak 20/03/2019

Business climate index falling and falling and falling Sentiment in German trade and industry darkened further at the start of 2019. The ifo business climate index dropped for the sixth consecutive time in February. At 98.5 points, it is now at its lowest point since December 2014. The surveyed companies rated their current business situation as less positive than in January. Prospects for the coming six months have also clouded over. Sentiment has deteriorated above all in the service sector. Service providers rated both their current situation and their prospects for the next six months as considerably less positive. The index for wholesale and retail increased moderately thanks to improved business prospects, even though the current business situation was rated as less favourable. While business sentiment in retail improved, it clouded over in wholesale. In the construction industry, the business climate index dropped due to a more negative view of the current situation. Business prospects, on the other hand, rose slightly. In manufacturing business sentiment was also down. Prospects deteriorated in February for the fifth time in a row. The pessimists among the surveyed companies are now in the majority. While the current situation was rated as not as positive, the large majority of companies still rate it as good. The export prospects of companies improved for the first time in four months.

Business expectations for the next six month

ifo Business-Cycle Clock German manufacturing* Boom

Upswing 25 Jan 2014

Jan 2011

Jan 2018

15 Jan 2017

Jan 2010 5

Jan 2016 Jan 2015

-5

Jan 2012

Jan 2013

February 2019

-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

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Economic outlook for 2019: domestically strong but externally weak 20/03/2019

Outlook At the turn of the year 2017/2018 the question was not whether economic development would be positive but how steep the upward trend would be. Now the opposite is the case. There is a feeling that the poles of the world are about to be reversed. Many sentiment indicators have deteriorated considerably in the last few months, as if the major political risks, from a no-deal Brexit to escalating trade disputes, were about to come true. The good news is that while economic risks are increasing, the political and financial risks seem to be decreasing. This is one way of interpreting the current course of the political risk index.

Risk index* 500 450 400 350 300 250 200 150 100 50 0

Political risk index

Economic risk index

Financial risk

*Index: 2007=100 Source: Macrobond

12

Economic outlook for 2019: domestically strong but externally weak 20/03/2019

Overall, there is no doubt that signs of a global slowdown are accumulating. Global economic growth is likely to ease to just over 3.25 percent. Global trade with goods and services is also expected to grow at a much slower rate of 3.5 percent this year (BDI 2019). The most important destinations for German exports are also affected by this trend.

Year-on-year development of exports to the 12 most important export destinations of Germany (2018) 2018 Exports

year on year

in billion euro

Share

in %

BIP forecast 2019 in % year on year IWF

EU COM

USA

113.5

1.7

8.6

2.5

2.6**

France

105.3

0.1

8.0

1.5

1.3

China

93.1

8.0

7.1

6.2

6.2**

Netherlands

91.3

6.3

6.9

2.6*

1.7

Great Britain

82.0

-2.8

6.2

1.5

1.3

Italy

70.0

6.7

5.3

0.6

0.2

Austria

64.8

3.2

4.9

2.2*

1.6

Poland

63.3

6.4

4.8

3.5*

3.5

Switzerland

54.1

0.1

4.1

1.8*

2.3**

Belgium

44.4

0.2

3.4

1.5*

1.3

Spain

44.3

2.9

3.4

2.2

2.1

Czech Republic

44.2

6.2

3.4

3.0*

2.9

Top 12

870.3

3.1

66.0

Euro area

492.0

4.5

37.3

1.6

1.3

1 317.9

3.0

3.5

3.5

Total

Sources: IMF (January 2019; *October 2018), European Commission (February 2019; ** November 2018)

For 2019, we are therefore only expecting a very weak rise in the export of goods and services in the order of 1.5 percent. On the imports side, we are anticipating two opposing effects. The weaker trend in exports will reduce demand for intermediates. On the other hand, the increasing demand for consumer and capital goods at home will keep imports growing at a good 2.75 percent. Overall, we expect net exports to pull GDP growth down by around 0.4 percentage points. In this scenario, we are assuming that there will not be a disorderly Brexit nor will there be tariff increases due to the smouldering trade tensions of China and the EU with the US.

13

Economic outlook for 2019: domestically strong but externally weak 20/03/2019

BDI forecast for 2018/19: Change in real economic output over the previous year in percent

2019

Federal Government 2019

European Commission 2019

1.4

1.2

1.0

1.1*

1.0

1.7

-

-

- Private Consumption

1.0

1.7

1.3

2.1

- Public Consumption

1.0

1.8

2.1

2.3

2.6

2.6

2.4

2.9

- Machinery and Equipment

4.2

2.5

2.3

2.9

- Construction

2.4

3.0

2.9

-

- Other

0.4

1.5

1.4

-

Exports

2.0

1.5

2.7

2.9

Imports

3.3

2.8

4.0

4.2

Net Exports, Economic Output

-0.4

-0.4

-0.3

-0.3

Actual figures 2018 GDP, real Consumption

Investment

BDI

Sources: Federal Statistical Office, Federal Government European Commission (November 2018, *February 2019), own calculations

Unlike the external factors, domestic demand should remain stable. We expect employment levels to keep rising this year, mainly for jobs subject to social security contributions. The number of vacancies is still high. Furthermore, the wage agreements reached in the past year and this year are well above the rate of inflation and will thus boost private purchasing power. The return to equal funding of the statutory health insurance contribution by the employer and the employee and tax changes should also help increase the disposable income of private households. All these factors should boost the private consumption. The consumer climate index calculated by the market research institute GfK remains on a high level. Although economic expectations have deteriorated, consumers are still making new purchases based on positive income prospects. We expect private consumption expenditure to increase by 1.67 percent this year. State consumption expenditure should rise slightly more, going up by 1.75 percent in real terms.

The economic slowdown last year has so far not had a large impact on the investment activity of companies. Compared to former investment cycles, we have noticed that investment cycles now tend to be less cyclical but longer. Capacity utilisation in manufacturing is still above its long-term average.

Order backlogs among capital goods producers remain high and domestic demand for capital goods increased according to the latest figures. We expect investment in plant and equipment to increase again, though at only 2.5 percent in real terms, markedly less than in the two previous years. Regarding

14

Economic outlook for 2019: domestically strong but externally weak 20/03/2019

construction investment, the high capacity utilisation rate in this sector will be the factor curbing growth as demand or housing and public infrastructure is expected to rise steeply in the coming years and will continue to be supported by financial policy. We expect construction investment to increase by around three percent. Investment in other assets (software, research and development) is set to grow by a much more moderate 1.5 percent. Gross fixed capital formation would then increase by 2.6 percent over the previous year. All in all, GDP should increase by 1.2 percent in 2019 in real terms over the previous year. No calendar adjustment will be necessary this year.

Sources BDI (2019). Global Growth Outlook. Growth or recession? Global economy at a crossroads.

15 February. Berlin.

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

This Quarterly Report Germany is a translation based on „Quartalsbericht Deutschland I / 2019“ as of 11 March 2019.

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Economic outlook for 2019: domestically strong but externally weak 20/03/2019

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

2018

2018

Q3

Q4

Q1

Q2

Q3

Q4

1.7

1.0

0.1

0.3

0.2

0.4

-0.3

0.6

-Private Consumption

1.8

1.0

0.1

0.2

0.4

0.2

-0.3

0.2

-Public Consumption

1.6

1.0

0.3

0.4

-0.4

0.8

-0.3

1.6

2.9

2.6

0.4

0.3

1.0

0.6

0.4

0.9

-Machinery and Equipment

3.7

4.2

1.2

0.5

2.2

0.3

0.0

0.7

-Construction

2.9

2.4

-0.1

0.2

0.8

0.9

0.7

1.3

-Other

1.3

0.4

0.2

0.4

-0.5

0.3

0.2

0.5

Domestic Demand

2.0

1.9

0.3

0.3

0.4

0.7

0.8

0.0

Exports

4.6

2.0

1.2

1.7

-0.2

0.8

-0.9

0.7

Imports

4.8

3.3

0.5

1.4

-0.3

1.5

1.3

0.7

Total

2.2

1.4

0.6

0.5

0.4

0.5

-0.2

0.0

Consumption

Investment

Contribution to growth (in percentage points) Consumption

1.2

0.7

0.1

0.2

0.1

0.3

-0.2

0.4

-Private Consumption

0.9

0.5

0.0

0.1

0.2

0.1

-0.2

0.1

-Public Consumption

0.3

0.2

0.1

0.1

-0.1

0.2

-0.1

0.3

0.6

0.5

0.1

0.1

0.2

0.1

0.1

0.2

-Machinery and Equipment

0.2

0.3

0.1

0.0

0.2

0.0

0.0

0.1

-Construction

0.3

0.2

0.0

0.0

0.1

0.1

0.1

0.1

-Other

0.1

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Change in stocks

0.1

0.6

0.1

0.0

0.0

0.3

0.8

-0.6

Domestic Demand

1.9

1.8

0.2

0.3

0.4

0.7

0.7

0.0

Net exports

0.3

-0.4

0.4

0.2

0.0

-0.2

-0.9

0.0

Investment

Source: Destatis

16