German slowdown cements ECB stimulus expectations

Germany’s economic growth slowed as expected in the third quarter, but growing expectations the European Central Bank will roll out more stimulus is boosting sentiment among companies.

The Federal Statistics Office confirmed that Germany’s GDP increased by 0.3 per cent in the July-to-September quarter, in line with the initial estimate.

But the report outlines how the world’s fourth-largest economy is being hit by the global slowdown, particular the weakening in emerging markets.

Exports increased 0.2 per cent compared to the second quarter, while imports climbed 1.1 per cent. This created a net trade deficit that knocked 0.4 per cent off Germany’s growth. Meanwhile, government spending rose by 1.3 per cent, which was the largest increase since the start of 2009.

‘Unspectacular growth’

Nevertheless, it seems that German companies are optimistic about the coming months, partially boosted by the prospect of looser monetary policy. Any wobbles in the third quarter are being put to bed.

The IFO survey showed business sentiment jumped to a 17-month high in November after a drop last month in the wake of the Volkswagen scandal.

Moreover, a report on Monday showed private sector growth accelerated in November to put German GDP on a solid footing for the fourth quarter. Markit's flash composite Purchasing Managers' Index (PMI) for the services and manufacturing sectors rose to 54.9 in November, well above the 50 level that separates expansion from contraction. This was a three-month high and signals “modest, albeit unspectacular growth, of the German economy”, according to Oliver Kolodseike, the author of the report.

The improvement in the German data lifted the flash composite PMI for the whole eurozone to a 54-month high. But Chris Williamson, the chief economist at Markit, believes even this will “do little to dissuade policymakers that more needs to be done at their December meeting to ensure stronger and more sustainable growth”.

‘Japanification’

One or two decent quarters of growth do not make a recovery, however, and the ECB is looking at combatting a far deeper problem facing the eurozone, argues Andrew Wells, global chief investment officer for Fixed Income at Fidelity International.

“Looking at the eurozone, ‘Japanification’ of that economy is dawning. While it may not have the corporate leverage and investment overhang of Japan in the 1990s, its demographic and reform challenges are similarly immense,” he says.

European stocks have risen since the lows of late September. German equities have done particularly well, with the DAX up 1,500 points in the last two months.

But as BlackRock’s Russ Koesterich points out, “the catalyst continues to be hope for more monetary stimulus, rather than signs of economic recovery”. This statement, he notes, had the “predictable” effect of driving up stocks and pushing down bond yields. Meanwhile, the euro languishes near a seven-month low against the dollar.

‘No cause for alarm’

In spite of fears about slowing growth in Germany and elsewhere, latest GDP data for the eurozone is not enough to “alarm” the ECB, says Azad Zangana, senior European economist at Schroders.

“Overall, the latest official growth data from Europe suggests a slowdown in activity, but a reasonably robust and stable recovery,” he explains. “There is little here to cause alarm, and would not be enough to trigger any major change in monetary policy.”

But he notes that ECB president Mario Draghi appears “very eager to expand quantitative easing for Europe, despite reasonable growth and recent upside surprises in inflation”

He adds: “The case for more stimulus has weakened, especially as markets have increased bets on the Federal Reserve raising its policy interest rate in December, which has helped reverse the recent appreciation of the euro against the US dollar which had caused concerns for the ECB.”