German Third Quarter GDP Preview:  Improving sentiment will limit recession

• GDP expected to show the second quarter of economic contraction.
• Investor sentiment has rebounded limiting the impact of negative growth.
• Economic data has improved in several important categories.

The German Statistical Bureau will release its preliminary estimate for third quarter gross domestic product at 7:00 GMT on Wednesday November 13^th, 2:00 EST on November 14^th.  A revision to the figures will be issued on November 22nd.

Forecast

Gross domestic product (GDP) is expected to have contracted 0.1% in the third quarter as it did in the second. Annual GDP in the third quarter will rise 0.9% from 2018 after a flat second quarter.

German GDP: Is the worst already over?

Growth in Germany is forecast to have contracted for the second straight quarter bringing Europe’s largest economy into recession but a sharp rebound in investor sentiment suggests that the downturn will be short and shallow.

The heavily export dependent German economy has been hard hit by the drop in global trade from the US China trade dispute and by concerns over the British exit from the European Union.

Gross domestic product, the widest definition of national economic activity, is predicted to have declined 0.1% in their third quartet following the same drop in the second. Two consecutive quarters of negative economic growth is the traditional definition of a recession. 

German GDP Q/Q

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Germany has not had a recession since the financial crisis of a decade ago though it has come close twice with a negative quarter followed by a flat one (Q4 2013 -0.6%, Q1 2014 0.0%, Q3 2018 -0.2%, Q4 2018 0.0%).

ZEW Survey

The ZEW survey of financial experts which measures institutional investor attitudes saw a large increase in outlook in November. The economic sentiment measure recovered to -2.1 from October’s -22.8 and the August eight-year low of -44.1.  Sentiment specifically about the eurozone economy jumped to -1 from -23.5 reported ZEW.

Zew Economic Sentiment

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Improving German Statistics

Other economic data appears to confirm that the pending US China trade deal and an orderly Brexit have helped to reverse economic trends.

Exports rose 1.5% in September after declining 0.9% in August. Imports rose 1.3% in September following August’s 0.1% increase and July’s 2.4% drop, hinting that the German consumer may be ready to resume spending.  Imports had fallen for four of the seven months back to March.

Exports

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Factory orders also rose 1.3% in September following declines of 0.4% and 2.1% in August and July.

Factory Orders

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US and Chinese officials have said a deal to reverse some of the tariffs imposed by both countries and settle a number of outstanding issues was in train. But US President Donald Trump cautioned recently that if the “phase one” deal was not signed tariffs could rise.

In Britain Prime Minister Boris Johnson’s Brexit deal appears to have a good chance of approval as his Conservatives lead in most polls for the December 12^th election.

Conclusion

The German economy is the heart of the euro zone, weakeness translates quickly to the euro and interest rates. If Germany has already seen the worst of the slowdown then the outlook for the monetary union as a whole and the euro, especially with Italy and France performing better than expected, may be brighter than anticipated just two months ago.