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Tuesday, February 26, 2008

Germany Q4 2007 Detailed Accounts

As already reported on this blog (based on first release prliminary data from the Federal Statistical Office) the German economy grew (after making allowances for price and seasonal and calendar adjustments) by 0.3% over the level of the third quarter of 2007. However, economic growth slowed down considerably in Q4 since in the third quarter GDP increased by 0.7%.

We now have the detailed results from the federal statistics office, and we find that economic growth in the fourth quarter was laregy supported by foreign trade and gross fixed capital formation (in particular in machinery and equipment).

An increase of seasonally and calendar adjusted exports by 1.3% and a slight decline of imports (–0.2%) resulted in steady growth in net exports, which contributed 0.7% to GDP growth. We should note however that the rate of increase in export growth is now slowing, and that if the trend seen in the chart below continues, then the German economy - which is essentially export dependent - will soon be in recession.

Domestic growth was based on continuing increases in gross fixed capital formation in machinery and equipment (and not in construction), which was up 3.4% on the preceding quarter. This investment in machinery and equipment is itself to some extent driven by the needs of the export industry. As can be seen in the following chart, this has really held up remarkably well, and it is the sustained pace of this investment which has really prevented the German economy slowing more at this point, although we will now need to watch carefully how this evolves in the coming months.

In contrast, capital formation in construction was down on the third quarter (–1.1%). The German construction industry has not been a driver of the Germany economy for many years now, and it is this weak construction share which in many ways explains why Germany is so exports dependent. The general line of the construction share is down - reduced by both constraints on public spending, as the non-discretionary ageing populated share continues to climb, and lower demand for new housing produced by Germany's comparatively lower rate of new household formation.

Overall final domestic consumption expenditure was an impediment to growth. In particular, final consumption expenditure by private households fell markedly (–0.8%) and to this weak private consumption was added a reduction in government final consumption expenditure, which had been increasing slightly during the first three quarters, but which also was down 0.5% in the fourth quarter when compared with the third.

As can be seen in the chart above, German private consumption has not prove able at this point to recover from the pre VAT increase surge in Q4 2006. Will the decison to raise taxes to try to "painlessly" address ageing population related fiscal problems finally turn out to have been one of the worst errors of economic judgement in recent European policy making?

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