German Q2 GDP Contracts Less Than Estimated; Business Sentiment Improves

Germany’s economy shrank less than initially estimated in the second quarter but the pace of contraction was the sharpest on record as the coronavirus pandemic shattered spending, investment and trade, revised data from Destatis revealed Tuesday.

Elsewhere, survey results from the ifo Institute showed that German business confidence improved for the fourth straight month in August.

Gross domestic product fell 9.7 percent sequentially after shrinking 2 percent in the first quarter. The rate was revised down from -10.1 percent estimated on July 30.

Nonetheless, the quarterly decline was much larger than during the financial and economic crisis of 2008/2009 and the sharpest since quarterly GDP calculations started in 1970.

The statistical office confirmed that the largest euro area economy has entered a recession in the second quarter.

On a yearly basis, GDP declined by a calendar-adjusted 11.3 percent in the second quarter versus the 2.2 percent fall posted in the first quarter and the initial estimate of -11.7 percent.

Price-adjusted GDP also declined 11.3 percent in the second quarter, which was revised from -11.7 percent.

The expenditure-side breakdown showed that household spending slid 10.9 percent on quarter due to the ongoing corona pandemic and the restrictions related with it, Destatis said. Preventing a larger GDP decline, government spending grew 1.5 percent.

Gross fixed capital formation decreased 7.9 percent as investment in machinery and equipment plunged 19.6 percent and that in construction fell 4.2 percent.

Exports and imports logged double-digit decreases of 20.3 percent and 16 percent, respectively. This suggests that the decreases were even markedly larger than during the financial and economic crisis in the first quarter of 2009.

A big rebound in the third quarter is already baked in the cake, but survey evidence, including from the Ifo business climate suggests that the recovery is slowing, Andrew Kenningham, an economist at Capital Economics, said.

According to ifo, the business confidence index rose to a six-month high of 92.6 in August from 90.4 in July. This was above economists’ forecast of 92.2.

The German economy is on the road to recovery, ifo Institute President Clemens Fuest said.

Companies assessed their current business situation markedly more positively than last month. Their expectations were also slightly more optimistic.

The current conditions indicator advanced to 87.9 from 84.5 a month ago. The expected level was 87.0.

Likewise, the expectations indicator came in at 97.5 versus 96.7 in the previous month. The reading was forecast to rise to 98.0.

Business sentiment strengthened in manufacturing, services and construction in August, while the upward trend flattened in trade.

Today’s Ifo index keeps the hopes for a V-shaped rebound alive, Carsten Brzeski, an ING economist, said. However, the fact that a rebound is not necessarily the same as a recovery will be the main theme of the coming months.

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