German GDP grew by 0.5% qoq in Q3 and the unemployment rate dropped further in November. However, the general downward trend in sentiment indicators for Germany is unbroken. In addition, monthly activity indicators such as production and order intake weakened substantially during Q3. At the same time, fiscal policy is tightening across the euro zone.

Germany’s strong export dependence, a huge advantage during the 2010/11 global upswing, is becoming its Achilles heel again. With 40% of German exports going to EMU countries the massive deceleration in EMU activity will hit German exports hard. They should grow by a meagre 1 ¾% in 2012 (imports: +3%). Furthermore, we expect investment in machinery and equipment to fall slightly in 2011 as capacity utilisation is declining and extreme uncertainty deters new investments. Also, growth in private consumption is likely to slow to +¾% as unemployment is set to increase somewhat and the 2012 wage round is likely to disappoint employees. All in all, the growth contribution from domestic demand should shrink to a meagre ½ percentage point. We have thus made a further downward revision to our outlook and now expect a technical recession in H1 2011. Even with some modest recovery in H2 this means that GDP will stagnate in 2012 after reaching a good +3% in 2011.

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Published by kind permission of Thomas Mayer.