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

Germany: Downs and Ups
• The impact of unusually cold weather on the
construction sector will hit Q1 GDP.
65
Chart 1: GDP and Composite PMI
1.5
• The narrowing trade surplus and weakness
in retail sales also point to a weak outcome.
• We have revised down our forecast: we now
look for GDP to contract on a q/q basis in Q1.
• However, with the improvement in leading
indicators stepping up a gear recently, a strong
rebound in Q2 growth is very likely.
• Germany is set to outperform the eurozone
beyond Q1 despite a lack of consumer demand.
60
55
50
45
40
35
30
25
20
15
98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Reuters EcoWin Pro
Composite PMI
German GDP
(% q/q, RHS)
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
-3.5
Survey strength
Our projection for German GDP in Q1 in the latest
Global Outlook was for a q/q increase of 0.5%. On
the basis of the leading indicators, a growth rate of
this magnitude looks feasible (Chart 1).
25
20
15
10
Chart 2: Construction Output (% q/q)
The ‘hard’ activity data released for Q1 to date point
to a much weaker outcome, however, related in large
part to the impact of exceptionally cold weather early
in the year on the construction sector. There is also a
question mark over the reliability of the growth rates
signalled by some of the leading indicators since the
onset of the financial crisis.
The positives
There were two key factors which led us to make
such a positive forecast for Q1 growth in Germany in
the first place. The first was the improvement in
activity in the global economy, evident in business
surveys like the PMIs as well as in the world trade
volumes data supplied by the CPB in the
Netherlands. The German economy is highly
sensitive to these developments, consistent with its
comparatively high manufacturing and export share
in GDP.
The second factor was the high probability that the
unusually large drag on q/q growth from inventories
in Q4 last year – of around 1¼ percentage points –
would at least partially reverse in Q1, boosting the
q/q rate of growth.
We also saw potential for the contribution to growth
from investment to pick up following a downward
surprise in Q4 last year, particularly from spending
on machinery. The latter declined by 1.5% q/q in Q4,
more than reversing the previous quarter’s increase
of 0.8% q/q.
5
0
-5
-10
-15
Shaded Area = GDP Contraction
-20
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Reuters EcoWin Pro, BNP Paribas
Forecasting q/q changes in investment spending can
be tricky given their volatility but there have been
encouraging signs. Business confidence has risen
markedly across a range of surveys while the data on
domestic capital goods orders have strengthened.
On the basis of the data for the first two months of
Q1, domestic orders for capital goods are on track to
rise by around 6% q/q.
The negatives
The principal constraint on Q1 growth, as highlighted
in previous analysis, is the construction sector. The
weather in Germany at the beginning of the year was
exceptionally harsh and this hit activity in the sector
extremely hard.
Construction output plunged by a massive 14% m/m
in January, the second-biggest m/m fall in the series'
history. Output subsequently rose in February but
only by a comparatively modest 1% m/m. This makes
a q/q fall of a double-digit magnitude a virtual
certainty for construction output in Q1.
Ken Wattret 7 May 2010
Market Mover
17
www.GlobalMarkets.bnpparibas.com