Survey results show German economy sustaining momentum

This week's burst of survey results show the German economy sustaining its momentum. Unless the wheels come off in the final quarter, Germany will record growth of more than 2% for the year, states Claus Vistesen, chief European economist at Pantheon Macroeconomics.

Although the IHS Markit Flash Germany Composite Output Index was at 56.9 in October, down slightly from September’s 77-month high of 57.7, the Ifo Business Climate Index hit a new record high in September, rising to 116.7 points from 115.3 in September.

While the most recent GfK consumer confidence index also dipped according to the survey results issued on 26 October, German consumers estimate that their economy is continuing to grow.

Optimistic expectations shared

Optimistic economic expectations for Germany are now shared by almost all economic experts, according to market research specialist GfK. It says this is demonstrated by the fact that growth forecasts for gross domestic product must be widely revised sharply upwards.

For example, the German Federal Government's current autumn outlook forecasts that the German economy will grow by two percent this year, after still forecasting a figure of 1.5% in April.

The International Monetary Fund's recently published forecast predicts that Germany will experience economic growth of 2% this year. The forecast was 1.8% as recently as July and just 1.6% in April, observes GfK.

Look to housebuilding

Pantheon's Claus Vistesen identifies the housebuilding sector as a particular source of economic activity. “Unlike some countries, Germany did not have a housing bubble in the pre-2007 economic cycle but we are seeing a big boom in housebuilding there now,” he comments.

This boom is, however, coming off a low base, and the strong German propensity to save remains very much a structural feature of the economy.

“Consumer spending will not be a secular driver of growth, because German consumers, unlike their counterparts elsewhere, will not lever up to buy consumer goods and services,” he observes.

There will be a bloodbath

Like most in his profession, Vistesen cannot simply enjoy a boom. He and his colleagues must instead focus on attempting to quantify when it will end, as of course history shows it must.

What goes up must come down and there will be a bloodbath in housebuilding, where equity reratings have been nothing short of spectacular in recent years.

“We have had a bull market since 2009 and we now seem to have a synchronised global recovery but it is rather long in the tooth now,” he asserts. “It won't die of old age but from an external shock.”

This external shock could take one of two forms, he suggests. One, the US Federal Reserve makes a mistake and raises rates too quickly. Two, China suffers a hard landing.

Given the linkages between China and the eurozone, an economic setback in the former could very quickly hit the latter.

Leaving problems behind

Carsten Brzeski ING's chief economist covering Germany and Austria, issued a brief note in reaction to the Ifo figures. “It seems that German companies have left increased geopolitical tensions, ongoing problems in the German automotive industry and the stronger euro behind,” he said.

“Whether this was the last hooray of the German economy or simply more evidence that German optimism these days is unbreakable remains to be seen. The ifo index has definitely washed away earlier tentative signs that the economy is levelling off.

“For the time being, the German growth party continues as if there was no tomorrow. The outcome of the federal elections has also clearly not shattered business optimism. Over the past one and a half years, the manufacturing sector has staged a remarkable rebound.

“Filled order books and low inventories should keep the manufacturing sector an important growth engine.

“If the European Central Bank manages to orchestrate a dovish tapering, without a stronger euro or higher bond yields, the external stimulus for the German economy will also remain intact going into 2018.”

For the record

For the record, Germany’s private sector economy maintained strong growth momentum at the start of the fourth quarter, according to the PMI survey data from IHS Markit. Inflows of new orders increased in October at the fastest rate for six-and-a-half years.

Overall business activity rose sharply, albeit at a slightly slower rate than in September. The pace of job creation accelerated to a five-month high. The survey showed a further pick-up in inflation pressures.

Average prices charged for goods and services rose at one of the fastest rates seen since mid-2011. Output growth was once again led by the manufacturing sector. Its pace of expansion eased slightly since September but remained strong overall.

Services echo the trend

Services echoed this trend. These recorded a robust increase in business activity. This was only slightly slower than seen at the end of the third quarter.

Phil Smith, principal economist at IHS Markit said: “Although the headline flash Composite Output PMI dipped slightly in October, the fundamentals remained strong and the economy has carried robust growth momentum into the closing stages of the year.

“Private sector job creation continued to gather pace, boosted by the greatest increase in factory workforce numbers since April 2011. Manufacturers reported ongoing efforts to relieve some of the strain on capacity, which saw backlogs rise sharply again and for a survey record 33rd month running.

Inflationary pressures

“Inflationary pressures continued to revive during the month, with the survey’s indicators of input costs and output prices closing in on the highs seen at the start of the year.”

Sentiment among German businesses is better than ever, according to the new record high Ifo Business Climate Index. In manufacturing the index also hit a new record high. Manufacturers were markedly more satisfied with their ongoing business. Optimism about the business outlook also surged to its highest level to date in 2017.

The main drivers were capital goods producers, especially mechanical engineering firms. Capacity utilisation in manufacturing rose by 0.4 percentage points to 87.1%, compared with its long-term average of 83.7%.

Sentiment improves

Sentiment among German service providers improved. The business climate index rose from 110.7 points last month to 111.4 points in October. Assessments of the current business situation, already very good, improved somewhat, observes ifo president Professor Clemens Fuest in his notes accompanying the results.

Service providers were also more optimistic about their six-month business outlook. Many are planning to increase prices. Older consumers in particular are tilting expenditure towards services and away from consumer goods, suggests Claus Vistesen.

In the transport and logistics sector the indicator hit a new record high. This was primarily due to far more optimistic business expectations. A growing number of transport and logistics companies plan to increase prices.

Consumers not clear

Consumer sentiment in the first survey since the German federal elections is not sending clear signals, according to GfK. The results of its latest consumer confidence survey show that both economic expectations and propensity to buy are on the rise in Germany, it reports.

In contrast, income expectations fell for the second time in a row. GfK forecasts a slight decrease in consumer climate for November compared to the previous month.

Consumers estimate that the German economy is clearly continuing to grow, says GfK. Economic expectations are rising sharply in October, with August's setback a distant memory. Income expectations fell for the second time in a row but remain at a very good level, says GfK.