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German Business Confidence Drops Slightly; GDP Growth Eases

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German business confidence weakened marginally from a 10-month high in May and the economy grew at a slower pace in the first quarter, as initially estimated, revealed two separate reports released Friday.

The business confidence index fell less-than-expected to 108.5 in May from 108.6 in April, according to a survey by Munich-based Ifo Institute. This was the first fall in seven months but the index came in above the economists' estimate of 108.3.

Companies were once again more satisfied with their current business situation, but were slightly less optimism about the months ahead.

The current conditions index rose unexpectedly to 114.3 from a revised 114 in April. Economists had expected it to fall to 113.5.

On the other hand, the expectations index slid to 103 in May, in line with expectations, from a revised 103.4 a month ago.

Although the small decline in consumer confidence left it consistent with pretty strong growth and came as a relief after bigger falls in other surveys, Jennifer McKeown, a senior European economist at Capital Economics said the decrease in expectations may warn of a slowdown to come.

In the longer run, the lack of new reforms to further reduce unemployment, the current investment gap and the deficit in digitalization could eventually backfire on the German economy once the current favorable tailwinds like the weak euro, low energy prices and interest rates disappear, ING Bank NV Economist Carsten Brzeski said.

Final data from Destatis today showed that Germany's economic growth eased as estimated to 0.3 percent in the first quarter largely due to the weakness in foreign trade and investment. Gross domestic product grew 0.7 percent in the fourth quarter.

Likewise, the annual growth slowed to 1.1 percent from 1.6 percent in the prior quarter. This was the slowest growth since the second quarter of 2014. The calendar-adjusted GDP also grew at a slower pace of 1 percent after rising 1.4 percent a quarter ago.

The first quarter GDP figures matched the preliminary estimate published on May 13.

The breakdown of GDP revealed that positive contributions to the growth came from domestic demand.

The quarterly growth in exports slowed to 0.8 percent from 1 percent and imports climbed 1.5 percent, slower than the 1.9 percent rise a quarter ago. Consequently, the net trade contributed a negative 0.2 percentage points to GDP.

Gross capital formation showed nil growth after rising 2.9 percent in the fourth quarter. Investment in machinery and equipment climbed 1.5 percent and that in construction climbed 1.7 percent. Changes in inventories contributed -0.3 percentage point to GDP.

Private spending rose 0.6 percent after increasing 0.7 percent and the growth in government spending improved to 0.7 percent from 0.3 percent.

The growth components showed that even if domestic demand has become an important growth driver, the lack of investment, leaving the construction sector aside, is currently probably Germany's biggest weakness, Brzeski noted.

In the monthly report, Bundesbank said private consumption is set to drive Germany's growth in the coming months and construction activity will improve. But momentum in the industrial sector is set to remain sluggish.

The German government forecast 1.8 percent growth for 2015, while the European Commission projected 1.9 percent growth.

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