Germany: Out of the frying pan into the fire

Today’s release of fou r th quarter German GDP , which was unchanged on the quarter, showed that the economy is “just scrapping by”. Arguably, zero growth already looks like a solid achievement given that the German industrial sector remains in free fall with production declining almost 2% in the fourth quarter. Thus, what the GDP numbers also show is a continuing strength of domestic demand that, for the time being, has offset the external weakness. That said, o wing to the adverse consequences o f the outbreak of the coronavirus to the Chinese and global economy , activity will deteriorate further during the first quarter. The economy will only rebound once the epidemic has been contained and the global industrial cycle picks up again. We expect this to happen during Q2, although there is obviously a high degree of uncertainty with respect to timing. But the German economy faces also some more deeply rooted structural problems that will weigh on growth in the coming years , independent of the current cyclical weakness . The car sector remains a t the core of these problems. As the latest numbers out of the sector show, the adjustment is far from finished. The economic weakn ess is confined to the manufacturing sector for now and activity in other sectors, such as construction and IT, continue to grow robustly. Very easy financial conditions, an expansionary fiscal policy, growing wages and employment will buffer the economy to some extent from external weakness and car sector related problems. Thus, we don’t expect the German economy to slide into an outright recession, assuming that the virus can be indeed contained during the first quarter.