There has been slowdown in the growth of the German economy in the second quarter of 2016. However contrary to expectations the growth, clocked at 0.4 percent, was better than what had been predicted. This was revealed in flash estimates from the country’s statistics office. The growth of the economy in the first quarter of the year was a bit higher at 0.7 percent.

The consensus forecast in a Reuters poll for 0.2 percent growth in the gross domestic product (GDP) of the German economy was beaten by the second quarter growth boosted and supported primarily by a rise in exports and household consumption. In the same period a year ago, the economy had grown at a rate of 1.8 percent year-on-year.

The growth in the GDP was weighed down however by weaker investment in construction and machinery.

While imports were slightly down compared with the first quarter of 2016 according to provisional results from statistics office Destatis, the exports were up.

“Both household final consumption expenditure and government final consumption expenditure supported growth,” Destatis noted.

“However, growth was slowed by weak gross capital formation. After a strong first quarter, a decline was recorded especially in gross fixed capital formation in machinery and equipment and in construction,” Destatis added.

But despite the more than expected growth in the German economy, why are a section of economists concerned?

The Germany economy had seen a slowdown “and hardly anyone notices”, said Carsten Brzeski, chief economist at ING-DiBa. The policy makers would be lulled into a false sense of security by the latest data, he believes.

“While at face value the slowdown is mainly the result of technical factors, the underlying trend could soon give reason for concerns,” he said.

“All in all, today’s GDP data was better than expected. In fact, they were probably too good for policymakers to change the current course and to start tackling weak investments. A risky strategy,” he warned.

“The current recovery is clearly running on its very last leg. Ironically, the recovery is currently artificially extended by two – in German public – controversially discussed factors: the ECB’s (European Central Bank) loose monetary policy and the influx of refugees,” Brzeski said despite noting the fact that the performance of the German economy since 2009 had been impressive.

“Looking ahead, German growth on the back of domestic drivers should hush often-heard international criticism. However, in the long run, it runs the risk of eating up the economy’s growth potential. To sustainably extend the current recovery (or initiate a new cycle), investments will have to pick up,” he warned.

“Up to now, investment levels (except for investments in real estate) have hardly picked up, despite low interest rates. Increased uncertainties after the Brexit vote, continued structural weaknesses in many euro zone countries and a renewed global slowdown make an organic pick-up investment rather unlikely. Directly or indirectly, kick-starting investment will require government involvement,” he said.

(Adapted from CNBC)

Categories: Economy & Finance