Is Germany’s growth losing momentum?

During the first quarter of 2014, Germany contributed to the Euro Area economic recovery with a seasonally-adjusted 0.8 % quarterly growth rate, according to the Federal Statistics Office. Domestic demand and a weather-induced construction rise had a positive impact in this sound growth rate. Nevertheless, the Bundesbank has warned in its July monthly report of a slowdown in Germany’s GDP growth. The figures of the German Central Bank indicate that factory production has been affected by the intensification of geopolitical tensions and calendar effects.

“Construction is continuing its uptrend, albeit at decreasing speed. The currently weak m/m figures reflect a normalization after the dynamic activity during the mild winter: construction is simply below the unusually high level we had at the start of the year”, says Dr. Simon Junker, deputy head of the department of forecasting and economic policy at the German Institute of Economic Research (DIW).

“Industry is also affected by this weather related effect, albeit to a much lesser degree. Here, in addition, the somewhat lower than expected growth in the Euro area and particularly in China weigh on activity, without reversing the – moderate – uptrend,” he believes.

Regarding the calendar effects,

“the most recent data – on economic activity in May – was substantially biased downward due to a bridge day effect: two of the public holiday in May were on a Thursday – which is accounted for by seasonal adjustment – thus giving many the opportunity to use the Friday as a bridge day, a fact not accounted for by the seasonal adjustment procedures,” explains the expert from the Berlin-based research institute.

In spite of all these data, DIW experts don’t expect a substantial slowdown of German economy. And IMF experts seem to agree on this, according to the conclusions of the Article IV Consultation with Germany that have also been released this week. While the Bundesbank announced Germany’s economic stagnation, the International Monetary Fund upgraded its growth forecast to 1.9%, as compared to previous forecast of 1.7% and concluded that the recovery is underway, although Washington-based institution also warned of possible consequences in the German export-oriented manufacturing sector of the precarious international environment.

Thus, IMF executive directors recommend more policies focused on strengthening domestic sources of growth and encourage the authorities to use available space to boost public investment in projects with true economic value. These two suggestions would definitely  help to the regional stability, especially after the weak performance of European exports in recent months.