Germany Shows Solid GDP Growth and Improved Confidence

Although we generally comment on the current day's data releases, occasionally we comment on previously released data if that data were released on a U. S. holiday. Such is the case this year when data on the German Gross Domestic Product for the third quarter and the IFO release for November were released on the U. S. Thanksgiving Day holiday, last Thursday.

The German Gross Domestic Product increased at an annual rate of 2.6% in the third quarter. Although this was less than the second quarter advance of 4.4%, the year over year increases show an increasing trend during the year. So far this year, GDP has averaged 2.5% above the average of the first three quarters of 2005 With the year over year growth rate increasing it is likely that growth in all of 2006 could be 2.5% or better, well above the poor growth of the last five years, as shown in the first chart Growth has been generated more by activity in the domestic economy than in the foreign sector. The second chart compares the year to year increase in domestic demand with the increase in net exports. So far this year the increases in domestic demand have been well above those in net exports. Consumer demand has probably been influenced recently by purchases in anticipation of the increased in VAT scheduled to come into effect on January 1, 2007, but expenditures on fixed investment have also been strong.

The 7000 manufacturing, construction, wholesale and retail trade firms that participate in the IFO survey of business conditions have become more optimistic regarding their current condition and their outlook for six months ahead. The overall appraisal or headline series rose 1.4% in November and was 9.3% above November, 2005. Confidence in conditions six months ahead began to decline early this year and continued to do so until October when it rose 0.3%. It has risen a further 0.9% in November. Confidence in current conditions faltered in August and September, but has improved in October and again in November.The indexes of confidence in current and expected conditions are shown in the third chart.