German economy disappoints

The inflation rate in October 2018 reached the highest level in ten years, and that despite economic output sagging in the third quarter. A fairly unpleasant combination – after the many success stories relating to the German economy in recent years. However, the current economic situation in Germany is not as bad as the news might suggest at first sight.

The relatively high inflation rate of 2.5 % is largely attributable to the increase in the prices of heating oil and petrol. Without considering mineral oil products, the inflation rate would have been only 1.7 % and therefore in line with the trend last year. On the spot market, the price of oil has now again lost some 20 % since its high in early October. This will presumably soon trickle through to the filling stations, at least as soon as the latest transport problems have abated.

On the growth front, the weak Q3 figure (-0.2 % QoQ) was presumably an exception and does not announce the beginning of a longer crisis. Over the summer months, above all the problems in the car industry squeezed the economic cycle. Output had to be throttled back significantly, as companies were very clearly unable to switch over to the new exhaust gas test standard and implement the corresponding vehicle registration regulations in time. The Federal Ministry for Economic Affairs and Energy estimates that the negative impact this had on gross domestic product (GDP) was no less than 0.4 %. In other words, excluding this one-time factor, the Q3 economy would have booked a slight increase.

In the fourth quarter we are likely to see both the car industry and car registrations make up lost ground to a certain extent, something already visible in the order receipts. For private consumer spending, which was likewise weak in the summer months, things will probably also look better in the final quarter given rising incomes and good employment levels and inflation essentially falling again. An important risk factor remains, namely the issue of trade restrictions and punitive tariffs, which will no doubt continue to at least depress sentiment.

Overall, we expect that Q4 2018 will see growth recover. Nevertheless, the growth rate for the year as a whole will be only a good 1 ½ % and thus a good half a percentage point lower than the previous year. For the coming year, we expect the growth momentum to dwindle further, but with a GDP increase of just short of 1 ½ % the economy will remain stable and in good shape.

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