15 February 2005

EZA 660: EZA Briefing Note

Germany; Economy
GDP decline in 4Q04 by 0.2% q/q (bringing Euro area GDP down to +0.2% q/q) – released 15Feb04 – negative surprise for the markets, which had expected a similar rise, but confirmed our view (EZA655/19Jan05) of inventory adjustment acting as a drag on growth until H105. The inventory correction – after a stock build-up by 1.6% of GDP in 3Q04 – has obviously been the driving force behind the decline, having lead to a 0.5% q/q decline in industrial production, but private consumption has also been very weak. Net exports on the other hand showed a modest recovery – following a previous slump – but obviously insufficient to offset the decline in domestic demand. The 4Q GDP number is likely to mark only a trough within a broader picture of economic recovery, as both, fundamental trends and monthly data – the surge in new orders and car registrations in Dec04 and the ifo business climate in Dec04/Jan05 – point to a significant recovery ahead. No change for the ECB - the figures matched our expectation of muted growth and reinforces our view that rates are likely to remain on hold at least until Q4 2005 and probably into 2006 Q1 (EZA647/01Dec04)

SummaryWhile both the trend and the vigour of the GDP growth in Germany has been a clear disappointment so far, there are strong signs for a strengthening of the economy ahead. We therefore maintain our view that the German economy is likely to stage a catch-up with the rest of the euro area in the latter part of this year.

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© Graham Bishop