Stockholm (Ekonamik) – At a time of gloomy forecasts for the EU economy, its engine added some fuel to the fire. According to figures published on Friday, February 22 by the German Statistics Bureau (Destatis), the German economy stagnated in the fourth quarter of 2018, in relation to the previous quarter. While the culprit seems to be inventories, the implication is less clear.
The figures are consistent with the bearish outlook for the EU economy. However, the situation is more nuanced than the headline figure might suggest. Of all the components of GDP, only inventories were down, taking away 0.6% of growth from the whole economy and dragging with it the entire investment side (down 1.9% on a quarter-on-quarter basis) of the economy. Otherwise, all other components made positive contributions to the economy, including demand, trade and the public sector. To be sure, the quarter-on-quarter GDP growth figures hide a growth of 0.9% in relation to the fourth quarter of 2017, with inventories contributing 0.5% to that increase.
Usually, a decrease in the stock of inventories suggests that orders are not being made which could be seen as a step towards lower consumption or exports in the coming periods. However, the rise in all other sectors of the economy makes this hypothesis somewhat implausible. The backlog of “unfilled orders” in October, November and December actually rose by 0.6%, 1.1% and 0.2%, respectively, according to Destatis. To understand the figures, it’s necessary to delve a little bit deeper into the sectoral details of German manufacturing.
According to ING and Deutsch Bank research (DBR), the main culprit seems to be the car industry which is struggling to keep up with the new Worldwide Harmonised Light Vehicle Test Procedure (WLTP), a new EU Law motivated by environmental fraud committed by the German car industry.
According to Carsten Brzeski, Chief Economist at ING Germany, the German car industry spend the second and third quarter of 2018 producing “cars [that] could not be delivered due to missed deadlines on new emission standards”. The inventory decrease suggests merely “that many German cars were finally delivered to clients”.
Eric Heymann at DBR concurs and adds a bullish note about future orders, stating that “the WLTP effect looks set to have contributed to higher order backlogs in the auto sector, as not all certifications had already been obtained and some models could not be ordered. With a rising number of new cars being WLTP certified, order volumes can be expected to soar.”
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