German economic growth contracts in Q3 2018 on problems in auto industry

The German economy shrank in the third quarter, owing to the issues in auto industry. On a seasonally adjusted basis, the German GDP growth contracted 0.2 percent on a quarterly basis. The fall in slightly stronger than consensus expectations of a contraction of 0.1 percent.

The growth contraction was mainly because of the problems in the automotive industry with the conversion to the new WLTP emissions test procedure. Thus the car producers have considerably reduced their production. This is likely to have reduced real GDP growth by about ¼ percent in the third quarter, noted Commerzbank in a research report.

However, even without the car effect, the German economy would barely had expanded at all, unlike in the first half of the year. This fall in growth is barely linked to domestic demand, which continued to be boosted by low ECB interest rates, which is reflected in a high level of the ifo business climate for the services sector.

On the contrary, confidence in the export-oriented manufacturing sector had worsened markedly since the start of the year. German exports even dropped in the third quarter. This in turn is possibly due to the fact that demand from China has expanded considerably weaker.

China faces problems from homemade problems such as the high indebtedness of its state-owned enterprises. Moreover, the trade war is causing major issues. However, the Chinese government is taking countermeasures and relaxing its economic policy. It has considerably lowered the minimum reserve rates for banks and permitted firms to incur more debt again and stimulate their investments.

“We have been pointing out downside risks for our growth forecasts for some time now. Following the weaker than expected third quarter, we have lowered our 2018 growth forecast from 1.8 percent to 1.5 percent”, stated Commerzbank.

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