Germany is teetering on the tip of a recession as the latest German business and consumer confidence indices drop. Other business cycle indicators for Deutschland also suggest an impending economic meltdown.
While Germany’s Gross Domestic Product (GDP) on a Purchasing Power Parity (PPP) basis continues to gain at October 2019 albeit at a tepid 2.3% annual increase, the biggest Western European economy may be topping out. Business cycle slowdowns typically happen within roughly 8 to 16 months from a peak in a country’s GDP.
GDP tracks a long-term growth trend via business cycles of growth or recession that repeat approximately every 5 years or so, albeit that no two business cycles mirror the same duration or size. America’s National Bureau of Economic Research states that there were 33 business cycles from 1854 to 2009.
But keep in mind that cyclical indicators are erratic with multiple major influences. Even more confusing is the fact that no consensus exists for which indicators universally trigger business cycles in all cases.
To impose some structure on this chaos, The Economist organizes its benchmarks into 3 critical categories: leading indicators that turn in advance of a cycle change; coincident indicators that define when the overall business cycle turns; and lagging indicators that top out following a business cycle.
Germany’s Leading Business Cycle Indicators
Although Germany retains its position as Europe’s richest economy, 3 of the selected 6 leading indicators below retreated over the 12 months comprising the latest reporting period. And those alarming developments were despite the Deutsche Bundesbank’s prime interest rate sitting at zero, leaving Germany’s central bank with no wiggle room for further decreases.
The Economist estimates that an economy hits its highest level about 8 to 16 months after business and consumer confidence starts to drop. There are shorter timeframes in advance of an economy’s GDP peak for slowdowns in car sales (6 months) and building permits (2 to 3 months).
- Interest rates: 0% at Dec. 2019 (no change from one year earlier)
- Business confidence: 99.12099 points at Oct. 2019 (down -2.6% from 101.7302)
- Building permits: 14,997 at Sep. 2019 (up 5.9% from 14,118)
- Consumer confidence: 100.6948 at Oct. 2019 (down -0.8% from 101.4722)
- Retail sales: Up 3.45% at Sep. 2019 (down -0.17% from up 3.62%)
- New car sales: 299,127 vehicles at Nov. 2019 (up 9.7% from 270,112)
Business confidence is an indicator based on opinion surveys revealing how pessimistically or optimistically business managers perceive their companies’ future potential and therefore can anticipate turning points in economic activity. In contrast, consumer confidence measures public opinions on standardized questions about household finances, a country’s economy in general as well as plans for major purchases on durable products lasting over a year or buying a home or an automobile.
Building permits mean official authorizations required before new building construction can proceed. Building permits are a leading macroeconomic indicator for both country and global business cycles. Typically, construction work starts immediately after a building permit is granted.
Retail sales refers to an aggregate measure of the percentage change in the retail sales index against the same month in the prior year. It measures consumer demand for finished goods and is considered a major macroeconomic indicator of whether an economy is moving towards contraction or expansion. Retail sales focus on volume changes only and exclude price level movements.
One bright spot for Germany, which is well-respected for sales of famous brands including Mercedes Benz, Audi, Porsche and Volkswagen, is the improving passenger car sales metric. That metric specifies the number of new passenger cars sold irrespective of price.
Germany’s Coincident Business Cycle Indicators
Percent changes in Gross Domestic Product (GDP) on a Purchasing Power Parity (PPP) basis are much-scrutinized headline numbers that define whether an economy is contracting or expanding. That’s because year-over-year GDP changes coincide with and thus signal the start of a recession or boom period.
The latest GDP on a PPP basis statistics reveal that the Germany’s economy is slowing given the modest annual growth.
- GDP: US$4.444 trillion at Oct. 2019 (up 2.3% from $4.343 trillion)
- GDP per capita: $53,567 at Oct. 2019 (up 2.3% from $52,386)
Please note that Deutschland’s share of the world’s overall GDP of $141.860 trillion was 3.1% at October 2019, down from 3.2% one year earlier.
In addition, Germany’s GDP per capita income of $53,567 is almost 3 times greater than the global average GDP per person of $18,391 as of October 2019.
Germany’s Lagging Business Cycle Indicators
All 3 of the selected lagging indicators improved compared to the same metric in the prior year. However, the crucial capital investment to GDP ratio grew at a very meager rate.
Usually capital investment shadows GDP peaks and valleys via a 12-month delay. Both inflation and unemployment accelerate about 6 months after GDP reaches its maximum growth.
- Capital investment to GDP ratio: 21.807% in 2019 (up 0.008% from 21.799%)
- Unemployment rate: 3.206% in 2019 (down -0.194% from 3.4%)
- Inflation rate: 1.486% in 2019 (down -0.441% from 1.927%)
The ratio of capital investment to GDP is a lagging but future planning-oriented indicator. It records the value that a country spends on capital development and infrastructure projects divided by its overall GDP output on a PPP basis.
Unemployment rate is a percentage based on a country’s total labor force, not its full population. It is a critical metric since most mortgage holders experience severe difficulties paying their debt obligations once they become jobless.
Inflation rate documents the percentage change in average consumer prices in a country over a one-year period, and measures cost-of-living.
Research Reference Materials:
Forbes, Recession Is Overdue By 4.5 Years, Here’s How To Prepare. Accessed on December 16, 2019
MarkLines Automotive Industry Portal, Germany Flash report, sales volume, 2019. Accessed on December 16, 2019
National Bureau of Economic Research, US Business Cycle Expansions and Contractions. Accessed on December 16, 2019
The Economist, Guide to Economic Indicators: Making Sense of Economics (7th Edition). Accessed on December 16, 2019
The Guardian, Germany on the brink of recession as business confidence nosedives. Accessed on December 16, 2019
Trading Economics, Interest Rate: Europe. Accessed on December 16, 2019
Wikipedia, Consumer confidence index. Accessed on December 16, 2019