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Germany falls into recession Q3 2001 Actual UBSW fc Market Previous % qoq, adjusted -0.1 -0.1 -0.1 -0.0 % yoy, adjusted 0.4 0.4 0.4 0.6 % yoy, unadjusted 0.3 0.4 n/a 0.6 German GDP contracted for the second consecutive quarter and in contrast to Q2, this time, the decline did not get lost in the rounding of the quarterly growth rate. Hence, it is now indisputable that Germany is in recession. Due to the bleak outlook for Q4, it is also undisputed that it will fall even deeper into recession. All components of final domestic demand dropped in Q3. Inventories experienced the greatest decline in the history of the pan-German national accounts data. Another surprise came in the form of the greatest trade surplus ever recorded. This pattern is unsustainable and will be reversed in the quarters ahead. We forecast a 0.5% contraction in German GDP in the current quarter. However, there are also some bright spots for 2002, most importantly the outlook for an end of the inventory correction and lower inflation which will relive private households? disposable income. Therefore, we stick to our GDP forecast of 0.6% this year and 0.9% in 2002 on average. Most components of domestic demand were in line with expectations in the third quarter. Private consumption dropped 0.2% as disposable income fell marginally and households lifted their savings to a rate of 10.5% from 10.2% in Q2. Equipment investment fell by 1.8% qoq after downwards-revised 3.2% contraction in the second quarter. As a slight surprise, construction investment was flat in Q3 rather than falling further. This was the first quarter since Q3 1999 in which demand in the sector did not decline. The greatest surprise within domestic demand was a record EUR5.4bn fall in inventories which resulted in a negative contribution of 1.1%pts to annual GDP growth, the worst figure since 1993 Q1. However, it has to be seen against the background of a 1.1% qoq rise in exports and a 2.2% fall in imports both of which seem to at least partly reflect logistical problems after 11 September. As far as the outlook is concerned, there is good and bad news, with the bad news more associated to the near term and the good news to the more distant future. The fall in the ifo index of business confidence suggests that equipment investment is likely to continue to fall in Q4 and in the first half of next year. We also believe that private households will remain cautious in the Christmas season and increase savings, also taking the introduction of new private pension schemes next year into account. This would depress GDP growth in Q4 and the early parts of 2002. We also expect both the negative inventory and the positive net export contribution to growth to be reversed, but this should have no significant net effect. On the positive side, the ongoing decline in energy prices, which is likely to be accompanied by lower core inflation next year, is expected to boost real disposable income next year. In addition, at some stage, precautionary saving is likely to be reduced both of which argues for a consumption recovery, even in the absence of employment growth. The substantial inventory contraction this year, which is expected to depress average 2001 GDP growth by 0.7%pts, would argue for a partial rebuilding in 2002, especially in the second half of the year which is likely to lift GDP growth then as well. All in all, the outlook is therefore for more and accelerating German GDP weakness around the turn of the year, but for recovery in the course of 2002 which is also expected to be supported by recovering demand from the US and other regions of the world which are experiencing greater policy stimulus than Germany and the euro area. Our average GDP forecast of 0.6% growth this year and 0.9% in 2002 remains in place. Our forecast for exit growth rates (GDP growth yoy in the fourth quarter) are ?0.3% for 2001 and 2.4% for 2002 which highlights the momentum of the recovery implied by these average growth rates. _______________________________________________ Holger Fahrinkrug Senior Economist UBS Warburg AG Stephanstra?e 14-16, D-60313 Frankfurt, Germany Tel. +49 69 1369 8280 Fax +49 69 1369 8221 Email: holger.fahrinkrug@ubsw.com
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