Disturbing Data

premium

A Setback, Germany's Economic Slowdown Could Be Worse

Worried about your factory looking like this? Source: Udo Lehmann
Worried about your factory looking like this?
  • Why it matters

    Why it matters

    Germany’s slowing economy may be a wake-up call for Chancellor Angela Merkel’s coalition, which has introduced a series of potentially costly social reforms.

  • Facts

    Facts

    • Germany accounts for more than one-quarter of the euro zone economy.
    • In other euro zone countries, Italy has fallen back into recession and the French economy is limping along.
    • After second-quarter decline, the yield of 10-year bonds in Germany dropped below 1 percent for the first time.
  • Audio

    Audio

  • Pdf

The German economy shrank slightly in the second quarter of 2014. This first decline since the end of 2012 might not be good news, but it certainly is no shock.

First, there are statistical reasons for the drop.

Government economists try to account for differences in the calendar year between individual quarters, but it’s not 100 percent accurate. The number of actual working days in a quarter can be easily determined, of course.

But nobody really knows how production is affected by a high number of “bridge days” ­– vacation days taken between a public holiday and the weekend. The weather makes things even trickier. During mild winters, there is indeed more work on construction sites than usual. But seasonal adjustments are based on normal weather conditions so increases in production are often overstated, which is exactly what happened in the first quarter.

A logical consequence is an understated second quarter.

Second, official figures always look at past performance and make no predictions about future growth.

Here’s one important early indicator for the German economy, however: Optimism felt at the beginning of the year has vanished. Germany’s Business Climate Index – prepared by the Institute for Economic Research in Munich – has fallen for three consecutive months now.

Also, incoming orders for German industry were noticeably down from the first three months of the year.

Want to keep reading?

Subscribe now or log in to read our coverage of Europe’s leading economy.