Market Economics | Interest Rate Strategy - BNP PARIBAS ...

As Chart 1 shows, a health warning is required on
the signals from the business surveys these days as
their ability to predict q/q changes in GDP has been
less accurate since the financial crisis. Still, they offer
an indication of robust short-run growth dynamics
which is largely backed up by the hard data. We say
largely because, at the time of writing, the full set of
monthly data for Q4 2010 is not available and the
indications have been mixed.
The signals from the industrial sector have been very
positive, with industrial output on track to rise by over
2% q/q on the basis of figures up to November. As
Chart 2 shows, this pace of growth has typically been
indicative of robust q/q GDP growth in the past. The
5%-plus surge in manufacturing orders in November,
one of the biggest increases on record, suggests that
the strength in output will continue, in line with the
signals from the surveys.
Retail sales data, in contrast, have been surprisingly
weak. On the basis of the figures available to date,
up to November, a large q/q decline in sales is on the
cards in Q4. This would compare to an average 0.7%
q/q rise in the first three quarters of 2010 and runs
counter to upbeat anecdotal reports from the sector
and buoyant survey data (discussed below). The
initial release of retail sales data from Germany is
one of the most volatile and least transparent in
terms of the breakdown of the figures, so we suspect
that there will be a big rebound in sales over the
subsequent months or that the November data will
be revised higher – or possibly both.
Trade figures for Q4 to date have also been a little
disappointing. Exports rebounded in November after
an unexpected fall in October but the increase was a
modest 0.5% m/m. Imports, in contrast, surged by
over 4% m/m in November. As a result, the trade
surplus fell to a five-month low. The overall rise in
exports in Q4 is shaping up to be around 1-1½% q/q
in nominal terms on the basis of the trade figures,
well down on the scorching pace of growth in the first
three quarters of 2010 – which averaged 6% q/q.
Based on the figures to November, the net trade
contribution to q/q growth in Q4 is likely to be broadly
neutral, compared to a positive contribution of 0.3 of
a percentage point in Q3.
Do the math
So how strong could 2011 growth realistically be in
Germany? Let’s start with Q4 2010’s growth rate and
then look at some scenarios for the subsequent
quarters. The simple models which we have used
previously to give us a heads-up on q/q changes in
German GDP, based on a combination of sentiment
surveys and hard data, point to a q/q rise in Q4 GDP
of at least 0.6%.
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Chart 3: Investment to GDP Ratio I
Capex (% GDP)
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91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Reuters EcoWin Pro
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11
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Chart 4: Investment to GDP Ratio II
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91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Reuters EcoWin Pro
If GDP was to increase by 0.6% q/q in Q4 last year,
and if we kept our initial q/q profile for 2011 the same
– meaning average q/q growth of 0.6% – full-year
growth in 2011 would be around 3%.
Alternatively, assuming 0.6% q/q growth in Q4 2010,
followed by an acceleration in H1 this year to around
1% q/q, as signalled by recent survey data, and then
moderation in the second half, 2011’s annual growth
rate would be about 3½%, in line with the expected
growth rate in 2010.
But given the buoyancy of leading indicators recently,
coupled with the broadening out of the expansion to
reflect robust domestic as well as external demand, it
is feasible that 2011 growth could be higher still.
Assuming a growth rate of slightly above 0.6% q/q in
Q4 last year, followed by an acceleration to 1% q/q
growth which is then sustained throughout the year,
the growth rate could be at 4% or above!
The bottom line, our revised forecast, is in Table 1.
We look for growth of 3.5% in 2011, the same order
of magnitude as this year and twice the government’s
estimate. We assume that q/q growth will pick up
over the first half of this year, in line with the leading
indicators, but then expect it to slow a little in the
Mean
Construction (% GDP)
Ken Wattret 13 January 2011
Market Mover
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