Germany narrowly avoids recession

Germany narrowly avoided a recession last year as growth in the fourth quarter was flat, according to preliminary data released by Destatis on Thursday.

Germany's real gross domestic product was flat quarter-on-quarter in the final quarter of 2018 compared to a 0.2% drop in the third. This was slightly below consensus expectations for a 0.1% increase.

Meanwhile, the seasonally and working-day adjusted year-over-year rate fell to 0.6% from 1.1% in the third quarter, missing expectations of 0.7% growth.

Destatis said positive contributions came from domestic demand, with gross fixed capital formation, especially in construction but also in machinery and equipment, up markedly compared with the third quarter of 2018. Meanwhile, household final consumption expenditure increased slightly and general government final consumption expenditure was up significantly at the end of the year.

However, development of foreign trade did not make a positive contribution to growth in the fourth quarter. According to provisional calculations, exports and imports of goods and services increased nearly at the same rate in the quarter-on-quarter comparison.

Daniel Harenberg, senior economist at Oxford Economics, said Germany avoided a technical recession in the second half "by a hair's breadth".

"Since the German statistical office had mentioned last month that it expected a slight expansion in Q4, today's reading surprised a bit to the downside, even though the more recently released hard data had already been painting a dismal picture for December. While the stagnation in Q4 means the German locomotive is slow to take up speed again, the strength in domestic demand, particularly in investment, is encouraging.

"And as we see private consumption strengthening further this year amid strong wage growth and slowing inflation, domestic demand could offset the rising external headwinds as Chinese demand is set to slow. For now, we maintain our view that the fading of the transitory factors that affected German industry will support a rebound of GDP growth in Q1, which we see at 0.5% q/q."

Andrew Kenningham, chief Europe economist at Capital Economics, said the fact that GDP was unchanged in Q4 following a small contraction in the previous quarter means it is "touch-and-go" whether Germany was in a technical recession in the second half of last year.

"Given that on this occasion there were no obvious temporary factors dragging on the economy, this bodes ill for economic growth this year too.

"While the there is no breakdown at this stage, the press release says that the decline was mostly due to weak net exports. However, it also concedes that household consumption increased only 'slightly'. In contrast, fixed investment held up relatively well, particularly in construction. Note that the weakness of the economy in Q4 cannot be attributed to the supposedly-temporary problems in the auto sector given that we already know that vehicle production edged up in the last three months of the year."