German Economy Might've Dogded Recession and the Outlook is Brightening

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- Trade balance data shows drag from 'net trade' vanishing.

- Upward revision to earlier number reduces depth of past fall.

- Suggests economy may have dodged contraction last quarter.

- Data out on Thursday 14 November will say the final word.

- But regardless, the German economic outlook is brightening. 

The German economy may have avoided a contraction last quarter and dodged a recession this year thanks to a surprise pickup in exports, which means 'net trade' might not have been such a drag on growth during the summer after all. 

Germany's trade surplus rose to €19.2 bn in September from €18.7 bn previously, trade balance data from Destatis revealed on Friday, after a 1.5% increase in exports to the rest of the world more than offset a 1.3% pickup in imports. The trade balance measures the difference in value between imports and exports, although it's the number of goods bought and sold rather than the value of goods that matters in the calculation of GDP growth. 

"Today’s trade data leave analysts somewhat scratching their heads. Despite the ongoing trade woes, German exports had a better-than-expected quarter," says Carsten Brzeski, chief economist at ING Germany. "A technical recession is not yet a done deal. In fact, today’s trade data suggest that there has been hardly any negative drag from net trade on 3Q GDP. With available monthly data also pointing to slightly positive private consumption and positive-to-flat construction, the jury is still out."

Above: ING Group graph showing changes in output from various industrial sectors since 2017.

The German economy contracted by 0.1% in the second quarter and a dire summer period for the continent's manufacturing hub has had investors, analysts and economists anticipating a further decline for the three months to the end of September. That would mean a 'technical recession', which is defined as two back-to-back quarters of contraction, but some economists are now telling their clients this could be avoided.

Germany's export-sensitive economy, whose manufacturers do much business in China, has arguably been among the most notable victims of the U.S-China trade war. Even more so than either of its two protagonists as the things stand. Friday's data confirmed that exports to China have fallen but it also revealed that business with the U.S. has picked up at the same time. 

Above: Pantheon Macroeconomics graph showing factory orders alongside production output.

"It will be a question of rounding in the end, but we now suspect that Germany just about avoided a technical recession in the last quarter. Looking beyond the next GDP report, the trend in export growth is still depressed, despite the jump in the year-over-year in September," says Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics

Germany's economic boat is a large part of the overall European flotilla and has an impact on the buoyancy of many others vessels so it can be an effective bellwether of the broader Eurozone. Typically, Eurozone growth has weakened markedly in the last year alongside that of Germany and forced the European Central Bank (ECB) to support the continental economy with interest rate cuts and a quantitative easing (bond buying) program. 

That's weakened the Euro and encouraged speculation that the bank is all but out of monetary bullets with which it could the next crisis. Meanwhile, the European Commission unveiled on Thursday new forecasts that pointed to another dire year ahead in 2020 but factory orders figures emerging from Germany earlier in the week suggested strongly that the manufacturing sector could be on the cusp of a turnaround. And any such thing is sure to be good for the broader German economy.


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