Germany: Q3 data signal slowdown in GDP growth – RBS

Research Team at RBS, suggests that the first post-Brexit activity numbers for Germany show that economic growth is likely to weaken in Q3 against the strong first half of the year.

Key Quotes

“Industrial production declined by 1.5% m/m in July taking the y/y rate down to 1.2%, the weakest rate since August 2014 and undershooting the Bloomberg median forecast of +0.2% y/y. The weakness was also evident in the factory orders numbers for the month, however, these tend to be more volatile. Similarly, retail sales dropped by 1.5% on the year in July, again, representing a multi-month low.

Forward gauges of economic activity do not give any reason to expect improvements in activity data in August. In fact, the Ifo survey points at further deterioration over the month. Although this is somewhat at odds with the signal from ZEW survey, the latter is a gauge of opinion among finance professionals rather than a direct measure of economic activity. On the closely watched PMI surveys, there has been relative resilience in manufacturing (though this is evidently not reflected in the July hard data), but clear weakness in services.

To assess the above developments in the context of economic growth, a simple gauge based on official industrial production and retail sales data, together with the services PMI survey (to account for the private sector nonretail output), suggests Q3 (WDA) GDP growth of about

0.4% y/y see chart below (where Q3 monthly data are unavailable, we assume latest values are repeated). This is against 1.9% y/y and 1.8% y/y rates in Q1 and Q2 respectively. To be clear, 0.4% is not our forecast for Q3 growth in Germany, given the limited amount of data so far. However, we think there is a strong case to believe the German economy is set to take a hit from Brexit and is likely to slow over the next few calendar quarters.

In the Eurozone context, we continue to expect the growth outcomes in H2 2016 and, more notably, in 2017 to surprise the consensus forecasts to the downside. We expect GDP growth to average 1.5% y/y this year and only 1.0% in 2017.”