Germany escapes recession for now but what happens next?

This morning has brought the economics equivalent of a cliffhanger as we waiting to see if Germany was now in recession or had dodged it. The numbers were always going to be tight. so without further ado let me hand you over to Destatis.

WIESBADEN – In the third quarter of 2019, the price-adjusted gross domestic product in Germany increased by 0.1% on the second quarter of 2019, after adjustment for seasonal and calendar variations.

So Germany has avoided what has become called the technical definition of recession which is two quarters of contraction in a row. However there was a catch.

According to the most recent calculations, taking into account newly available statistical information, the GDP was down 0.2% in the second quarter of 2019, which is 0.1 percentage points more than first published.

So like the UK the German economy shrank by 0.2% in the second quarter which means that over the half-year the economy was 0.1% smaller. Putting it another way the economy was at 107.20 at the end of the first quarter and at 107.03 at the end of the third quarter.

Just to add to the statistical party the first quarter saw growth revised higher to 0.5% so we have a pattern similar to the UK just weaker. As to the detail for the latest quarter we are told this.

positive contributions in the third quarter of 2019 mainly came from consumption, according to provisional calculations. Compared with the second quarter of 2019, household final consumption expenditure increased, and so did government final consumption expenditure. Exports rose, while imports remained roughly at the level of the previous quarter. Also, gross fixed capital formation in construction was up on the previous quarter. Gross fixed capital formation in machinery and equipment, however, was lower than in the previous quarter.

As you can see it was consumption which did the job which was presumably driven by the employment figures which remain strong.

Compared with September 2018, the number of persons in employment increased by 0.7% (+327,000). The year-on-year change rate had been 1.2% in December 2018, 1.1% in January 2019 and 0.8% in August 2019.

So rising employment albeit at a slowing rate and with it looks as though there has been solid real wage growth too.

 In calendar adjusted terms, the costs of gross earnings in the second quarter of 2019 rose by 3.2% year on year,

At that point inflation had slowed to 1.5% so as far as we know there has been both employment and real wage growth. So we might have expected consumption growth to be higher than it has been.

We are in awkward territory with the mention of exports because they do not count in the output version of GDP as they are sales hence they go in the expenditure version. So we look at production for overseas sales which is problematic as shown below.

Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports increased by 4.6% and imports by 2.3% in September 2019 year on year. After calendar and seasonal adjustment, exports were up 1.5% and imports 1.3% compared with August 2019.

But whilst that is good GDP counts this.

In September 2019, production in industry was down by 0.6% on the previous month and -4.3% on the same month a year earlier (price and calendar adjusted)

Now production is not the only source for exports as services are not in it but services will have had to had been booming so we need more information I think.

Statistical Humility

The analysis of GDP numbers to 0.1% is something I have warned about before. Let me illustrate with this from Sweden Statistics earlier.

Statistics Sweden is publishing revised statistics on the Labour Force Surveys (LFS) for the period July 2018 to September 2019, in which only half of the sample is used, due to an earlier identification of quality deficiencies……..this increases the uncertainty, particularly at a more disaggregated level.

You can say that again! Or to put it another way the unemployment rate of 7.4% in September is now reported as 6.6%. Now we all make mistakes and honesty is the best policy but an error of this size begs so many questions. It reminds me of the mistake made in Japan over the measurement of real wages which was in the same direction although of course had the opposite implication for the economy.

Whilst neither example was about GDP the same principles hold and in the case of Sweden I think the mistake is worse because unemployment is a much simpler concept.

Looking Ahead

This could not have been much more negative.

Business confidence across the German private sector
has slipped to the lowest since the global financial crisis,
according to the latest IHS Markit Global Business
Outlook survey. Output of goods and services is on
average expected to fall slightly over the next 12 months,
while firms have signalled their intention to cut
workforce numbers for the first time in ten years.
Concerns about future profits are meanwhile reflected
in a negative outlook for capital spending (capex).

Now Markit have not had a good run on Germany as they have signalled growth when there has not been any so I am not sure where this takes us? Where there might be some traction is in this bit as we have noted already that employment growth is slowing.

now these latest figures point to private sector workforce numbers actually falling over the coming year.

As to other areas the example is mixed. For now the news seems bad and you will have probably guessed the area.

“By the end of 2022, Mercedes-Benz Cars plans to save more than 1 billion euros in personnel costs. To this end, jobs are to be reduced,” the company said in a statement.

“The expanded range of plug-in hybrids and all-electric vehicles is leading to cost increases that will have a negative impact on Mercedes-Benz Cars’ return on sales,” it added. ( )

Looking further ahead there is potentially some better news on the horizon.

Tesla’s chief executive, Elon Musk, has said Berlin will be the site of its first major European factory as the carmaker’s expansion plans power ahead.

“Berlin rocks,” Mr Musk said, adding Tesla would build an engineering and design centre in the German capital.

Tesla previously said it aimed to start production in Europe in 2021.

The moves come as the firm, which has also invested heavily in a Chinese factory, faces intensifying competition in the electric vehicle industry.


Let me start with this just released by the Financial Times.

Learning to love negative interest rates……..As evidence accumulates the naysayers case becomes less convincing.

So Germany should be booming right? After all it not only has an official deposit rate of -0.5% but it also has a benchmark bond yield of -0.3%. Yet the economy had a burst of growth and has now pretty much stagnated for a year. So actually it is the case for negative interest-rates which has got weaker. No doubt more of the same “medicine” will be prescribed.

We find ourselves observing what has become a two-speed economy where the services sector is struggling to make up for the declines in the manufacturing sector or if you like they are turning British. There are deeper questions here as for example how much manufacturing will remain in the West?

Also the money supply situation which has been helpful so far in 2019 may be turning lower for the Euro area as a whole.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 7.9% in September from 8.5% in August.

So for now there is not much sign of a turn for the better and if we stick to annual GDP growth as our measure that will be focused on the first quarter next year as there is a 0.5% reading to be replaced.  Germany must have its fingers crossed for the end of the trade war.

The Investing Channel



13 thoughts on “Germany escapes recession for now but what happens next?

  1. Good news and bad news for the car manufacturers as you have highlighted above, Daimler going to struggle short tern however its good news for Germany for the eventual production of Tesla.

    However in the short term for the car makers they will struggle due to cost cuts and moreover the public are slow to turn to electric vehicles due to the cost differential.

    But furthermore due to the higher costs of electric and hybrid vehicles will it mean less vehicle produced in future? Less vehicles equates to less production workers and therefore less employment!

    Then we have the advancement of robots and in the UK Carney warned of million of job losses in future and that will also affect Germany as well, all around the world will embrace robot technology and even though there will be more work in technology I envisage a negative effect on jobs overall.

    As for negative interest rates, we have seen -0.5% and possibly lower to come but have negative can interest rates go.

    I appreciate you say -0.5% has had little effect but what would say -1%. -2% have an effect on the economy?

    You could look at Japan but negative interest rates been small overall so that isn’t really a good model and one must appreciate that negative interest rates will affect each country differently.

    If I had 10 children and each gave them £10, then charged them 5 pence to save or they could spend their money, but told my kids the price for Jaffa cakes may fall next week, and my next door neighbour did the same; I would bet you, we would each come up with different results as to how many saved their £10 and how many spent their £10!

    Also I reckon if of my theoretical 10 kids would have bought a packet of 10 Jaffa cakes at £1.05 as against 20 Jaffa cakes for £1 at Tesco, one of my kids would have been that greedy they would have grabbed the first one they saw on the shelf and bought the 10 Jaffa cakes for £1.05 !

    So there you have it, economics isn’t as simple as people think or can predict!

    • edit:

      My post should have read:

      Also I reckon if my theoretical 10 kids would have seen a packet of 10 Jaffa cakes at £1. at Tesco, and on the lower shelf 20 Jaffa cakes for £1.05, one of my kids would have been that hungry he or she would have grabbed the 10 Jaffa cakes for £1.

      • Mark Carney would have used the price of 20 Jaffa cakes as the justification for cutting rates as the price had halved and therefore indicated the deflationary forces present in the economy.

        • Kevin,

          Shaun isn’t; the first economist to explain monetary policy by the use of confectionary and in particular “Jaffa cakes”, one of the FT’s correspondents was also a fan of the MARS bar standard in 2006

          Prior to that Michael Bond also was a fan of the MARS bar theory on inflation

          However one of the problems with the MARS bar indicator was the size been altered over the years.

          As for a Jaffa cake indicator the manufacturer may muddy the water by reducing the size of a 10 pack to 9 and keeping the price the same.

          However some would think the BOE members are already doing that by having numerous sets of inflation data in the index like CPI and RPI which to me look like the same kind of deceit.

          As to my packet of Jaffa cakes I did have a packet of 10 last night which was supposed to last me all week, but there are only 4 left now this morning so I will have to buy more today.

          • My own inflation indicator is the price of a Big Mac, which has no interest in hedonic adjustments, doesn’t change size and goes up every year by 5-10%p.a.which is what McDonald’s sees as its increase in costs.

            Another long term favourite of mine is the Cadbury’s Creme egg, which I remember being 6d in 1969, that’s 21/2p, they are now about 65p,of course Cadburys would scream that the price of their ingredients have gone up massively since then, but if you look at a chart of cocoa futures in dollars, it is the same price now as it was in 1976 – $2,676, my chart only goes back to 1973 and then it was $700 a ton, so like oil at the time, it probably quadrupled in the oil crisis of 1973/4 but since then has hardly moved!
            I would say the size of the egg now is nothing short of a joke, my son remembers being able to spoon the filling out with a teaspoon they were that big back in the day, now they look more like quails eggs to me, hedonically adjust that and you get a price probably nearer a pound today. I would think for something that cost 2.5p fifty years ago, I don’t think even house prices have gone up that much.I make that 6.7%pa inflation if it is now 65p and 7.7% inflation if it is a pound now.

        • This morning we had Viki Pryce trotting out the same old myth that if we had deflation people wouldn’t buy anything. And yet we have constant deflation in mobile phones, tv’s computers. As it was the beeb no-one challenged her.

          Recently I saw an argos catalgoue from 1982. A decent tv cost £315 (with forward facing speakers no less). That was a huge amount of money then. But have people stopped buying tv’s now that they’re £150?

          Of course not.

    • Automation and productivity growth is as much about tax and welfare policy and minimum wage levels as it is to do with technology.

      Witness car washes. There is perfectly good automated technology for even touchless car washes, but because of seemingly endless supplies of cheap, subsidised labour from eastern europe supported by tax credits and housing benefit, they’ve become very popular….despite the environmental disaster they represent with run-off.

      And witness self scanning in supermarkets. The technology has been around a long time, but it was only when Osborne tried to cut the terrible costs of Brown’s tax credits by drastically rasing the minimum wage did they become quite so widely rolled out.

      It is some of the simplest pieces of technology that have the widest application where there is a monetary incentive and will.

  2. Great blog and video as usual, Shaun.
    Your discussion of the German real GDP numbers perfectly shows how dumb the so-called technical recession definition is. Real GDP in Germany was lower in 2019Q3, at least by the latest update, than it was in 2019Q1, yet because all of the reduction was in 2019Q2 it is not a technical recession. If there had been the same reduction occurring with decreases in both 2019Q2 and 2019Q3 it would have been one. Yet a decrease of 0.16% in real GDP over two quarters, or 0.32% at an annualized rate, wouldn’t seem on the face of it to constitute a recession. (I know that real GDP growth rates aren’t measured to two decimal places of accuracy, but I have shown them this way to avoid speaking of a 0.2% decrease that is 0.3% at an annualized rate.) I don’t know how different this decline would look if you examined real GDP per capita rather than real GDP. I expect not much. The US has the non-partisan National Bureau of Economic Research to adjudicate on whether a recession has taken place or not, and every country should have something similar.

    • Hi Andrew

      I think you are right and a better definition of a recession would be a fall in GDP over a half year. Also an individual measure such as GDP per capita would be another useful signal.

      On that subject we do not know the population change but if it continued at the same rate as in 2018 then we are looking at a GDP fall per capita of 0.3%

      Productivity is also having a rough run because we know GDP was up 0.5% over the year but employment did this

      “The economic performance in the third quarter of 2019 was achieved by 45.4 million persons in employment, which was an increase of 356,000, or 0.8%, on a year earlier.”

      Of course many of the caveats I apply to productivity measures in the UK will also apply here.

  3. Hello Shaun,

    it is fortunate that Germany avoid a “technical ” recession but the winds are still against them as you point out . The EU must be sighing with relief !

    but “how much manufacturing will remain in the West?”

    indeed all will get put abroad in China or India as they have cheaper energy , labor and environmental costs . inevitable really .


    • Hi Forbin

      Car production in Europe seems to be heading south and in fact out of the continent. Next there is the issue that in the end electric vehicle production seems set to be cheaper in the Far East. Neither seems exactly bullish…

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