News
About the German non-recession
Bruno Cavalier
Chief Economist at ODDO BHF
The German economy has been on the brink of recession for some time now without sliding into it, however. The current economic slowdown started almost two years ago, which is long. The correction is concentrated on industry (notably automotive), with little overspill to the rest of the economy. Some observers will see this as proof that Germany does not require a fiscal stimulus, with domestic demand holding up well. However, an economy of this size should not experience such jolts following a sector shock or uncertainties in external demand. This is the sign that its policy-mix is not the right one.
The probability of recession is beginning to decline
Since 2018, the German economy has recorded two quarters of contraction in real GDP, albeit not consecutively (Q3 2018 and Q2 2019). It has therefore averted a "technical recession", unlike Italy, which saw its GDP contract for two quarters in a row (Q2 and Q3 2018). On the basis of the most recent data available, German GDP now stands at +0.5% year-on-year, Italian GDP at +0.3%. Such a slight difference may only be due to the respective volatility of the national accounts. In both cases, this result is poor but for Germany, which has sounder fundamentals than Italy in many domains (labour market, government finance), it is particularly disappointing. The "technical recession" concept is easy to measure but for analytical purposes, it is relatively useless, particularly as it is based on GDP which is subject to further revisions. To evaluate the risk of recession, it is better to gauge whether the economic slowdown is durable, deep and diffuse1. As GDP growth has slowed continuously since end-2017, peaking at +3.4% year-on-year, the duration criterion is certainly met. The conclusion is less clear for the depth criterion. Some activity data have corrected sharply, up to -5% for industrial production, but annual GDP growth remains marginally in positive territory (chart lhs). Regarding the diffusion criterion, it is not met. Industry aside, economic activity continues to progress; job creation is positive even though it has slowed; unemployment remains very low; household consumption is rising; and a highly cyclical sector such as construction is in robust health, to such an extent that some fear that it is overheating. There is nothing here that fits an economy heading towards a recession, but these indications do reflect a severe industrial crisis, much of which is due to the automotive industry. The fact that a major economy like Germany is so dependent on a single sector of activity gives significant cause for concern2.
2 See our Eco Note of 25 April 2019: “What’s Germany worth without the automotive industry?”
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