Will German ifo point softer recovery momentum?

Chris Scicluna
Emily Nicol

Key points:

  • Will ifo survey suggest a levelling off in German recovery momentum?
  • The drop in German GDP in Q2 was not quite as sharp as previously thought while the household savings ratio near-doubled
  • Australian exports slip back and imports surge at the start of Q3, while domestic demand is likely to be held back the renewed decline in employment

ifo indices to suggest a moderation of German growth momentum?
Today’s most notable data from the euro area come from Germany, with the results of the August ifo business survey due shortly. These are expected to be consistent with continued economic recovery, albeit with some suggestion of a levelling off of momentum, particularly in the services sector where the need for ongoing social distancing continues to weigh on activity.

The headline ifo indicator for current conditions is expected to rise further from 84.5 in July, while remaining well down on the high for the year reached in January (99.1). The headline expectations index, however, had already risen sharply over recent months as recovery began, and at 97.0 in July was already at its highest since November 2018, so further improvement in this index looks far less certain. Last Friday’s flash PMIs suggested acceleration in manufacturing (the respective PMI rose 2pts in August to 53.0) but a weakening in services (down 4.8pts to 50.8) so that the composite PMI fell 1.6pts to 53.7 with the composite employment index (46.6) implying ongoing labour market weakness. Today’s survey will give a fresh take on developments in those sectors as well as new insights into retail/wholesale trade and construction, with high-frequency indicators having hinted at a levelling-off in activity in certain parts of the economy after the initial vigorousn rebound.

Drop in German GDP in Q2 was not quite as sharp as previously thought... 
Meanwhile, the updated estimates of German GDP published earlier this morning suggested that the decline in economic activity last quarter was not quite as big as previously thought, but was still the steepest on the 50-year series and was roughly twice as severe as the worst quarter during the global financial crisis. In particular, having contracted 2.0%Q/Q in Q1, German GDP in Q2 dropped 9.7%Q/Q (compared to the initial estimate of a decline of 10.1%Q/Q) to be down 11.3%Y/Y.

The expenditure components, published for the first time, inevitably confirmed that all types of private demand fell sharply. In particular, household final consumption expenditure fell 10.9%Q/Q. Gross fixed capital formation in machinery and equipment fell almost twice that pace, down 19.6%Q/Q. But the decline in construction investment was somewhat more moderate at 4.2%Q/Q, and followed a surge in Q1 (5.1%Q/Q). And government consumption provided some support, rising 1.5%Q/Q.

The shock to German external trade in Q2 was also immense, and far more severe than during the global financial crisis. Following a drop of 3.3%Q/Q in Q1, exports of goods and services fell by a record 20.3%Q/Q in Q2. And imports fell 16.0%Q/Q in Q2 having dropped 1.9%Q/Q in Q1.

...while the household savings ratio near-doubled
Among other detail on the performance of Germany’s economy in Q2, employment fell 1.3%Y/Y, the first such decline in a decade. But that drop would have been much sharper without the government support provided via its short-term working (kurzarbeit) scheme. Indeed, the average number of hours worked per person fell a record 8.8%Y/Y, with total hours worked down 10.0%Y/Y. Average wages and salaries per employee fell 4.8%Y/Y, but government support meant that disposable income fell just 0.8%Y/Y. And so, with spending down far more steeply, the household savings ratio near-doubled in Q2 to 20.1%. That increase in household savings, together with ongoing government stimulus initiatives and the extension of the kurzarbeit scheme (which was still supporting about 5.6mn employees at the end of July) should help to ensure continued (if rather patchy) recovery, at least over the near term. The profile of the pandemic, however, remains key.

Aussie exports and employment slip back at the start of Q3:
Today’s preliminary trade figures for July suggest that net goods exports remained a notable drag on GDP growth at the start of Q3. Indeed, according to the ABS, the value of exports fell 6%M/M, almost twice the pace of the monthly increase in June. This reflected a sharp decline in the value of shipments to China last month, driven by a drop in exports of iron ore and copper following record export value levels for both commodities in June. Exports to Japan and Korea also slipped back. But the trade performance was also impacted by a notable increase in the value of imports (up 11%M/M) as domestic demand continued to recover after the initial lockdown. This was partially driven by a rebound in imports of vehicles (up almost 50%M/M) although the level still remained extremely low by historical standards.

Notwithstanding the jump in imports in July, domestic demand seems bound to have been negatively impacted by the resurgence of coronavirus cases and reinstatement of restrictions across Victoria. Some of the initial impact was evident in the latest ABS weekly payrolls figures, which showed that payroll jobs in Victoria fell by 2.8% in the month to 8 August. Overall, the drop in total payrolls was more modest at 1%, albeit leaving them still 4.9% below the level in mid-March when Australia recorded its 100th coronavirus case. Indeed, just 43% of the jobs lost by mid-April have now been recovered, with just 12% in Victoria. And while the number of daily Covid cases has subsequently fallen back, we still expect to see a drop in the official employment figures for the month of August as a whole.

Today in the UK and US:
Looking ahead, this morning will bring the latest UK CBI distributive trades survey for August, which is expected to point to a pickup in retail sales this month as shopper footfall improved further, among other things encouraged supported by the government’s ‘Eat out to help out’ scheme. However, with the government’s Job Retention Scheme being tapered, and several large retailers already announcing their intention to make significant reductions in staffing levels, the survey could flag expectations of tough times ahead for the retail sector.

In the US, today will bring the Conference Board’s consumer confidence survey for August, along with various housing market indicators including July new home sales and FHFA and S&P CoreLogic price indices for June. 

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