Stable energy prices provide support for a German economic growth recovery

Germany is at risk of entering a technical recession after GDP shrank 0.1% in the second quarter of 2019. Pessimism is lingering that there will be another quarter of declining GDP growth when it is reported on 14th November.

Commenting on the events, Daniel Casali, Chief Investment Strategist at Smith & Williamson Investment Management, noted:

“If German real GDP contracts in the third quarter, many will point the finger at trade and the auto industry for being responsible. There has been a spate of weak data reported by German factories recently. In August, manufacturing production fell 4.1% from a year earlier and forward-looking manufacturing orders were down 6.6%, suggesting factory output could potentially fall further from here. Looking a little deeper at the data, the downturn seen in new car production (a key industry in the manufacturing sector) appears to have troughed in July and has steadily picked-up over the last few months. The data indicates that auto output recovered in the third quarter and the sector may not necessarily be the root cause of slowing economic growth.”

“The recent increase in the crude oil price is more likely to be the main factor in the downturn. Germany has the second highest volume of road traffic per unit of GDP in the world, behind the U.S, and has high energy needs to serve that volume of transport. There is little domestic crude oil production so the nation is highly dependent on energy imports. As the value of oil imports increase, Germany’s trade surplus narrows and detracts from GDP growth. This probably explains the fairly tight relationship between GDP growth and changes in the crude oil prices.”

“The good news is that the major impact of the crude oil price is short term. As the Brent crude oil prices has stabilised below $60 a barrel, down from a peak of $74 a barrel half a year ago, the drag on German real GDP from energy prices should ease going forward. Look for the German economy to stage a recovery over the coming quarters.”

Sources: Bundesbank industrial production data, Refinitiv (Thomson Reuters), BCA and Smith & Williamson Investment Management LLP (data correct as of 24th October)

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