Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
Production shortfalls in the auto industry related to emission
test delays account for much of the third-quarter deterioration in
GDP growth
Along with drought related problems, factors to be unwound in
subsequent quarters caused about 70% of the Q3 downturn
Germany's economy has been slowing but should maintain
underlying momentum of 0.3-0.4% q/q in 2019
For the first time since early 2015, German GDP growth turned
negative at -0.2% quarter on quarter (q/q) in Q3. This compares
with fairly steady growth of around 0.5% during the five preceding
quarters and an average of also 0.5% since mid-2013.
This can be explained partly by a slowdown in global demand,
owing to US protectionism, US monetary policy tightening, and
Brexit related uncertainty. This has clearly dampened German
exports and investment this year. In addition, the 25% increase in
oil prices between April and early October has hurt consumer
spending.
Nevertheless, the magnitude of the latest worsening of Germany's
growth performance has surprised, given the ongoing support from a
construction industry operating at capacity limits, a continually
improving labor market, and above-average wage and pension
increases. The explanation is found with one-off technical factors,
namely a technically induced temporary reduction in car production
and hampered delivery of key commodities by river due to this
year's drought.
The role of the car industry
In September 2017, the EU introduced a new, globally harmonized
emission test procedure called WLTP (Worldwide Harmonized Light
Vehicles Test Procedure). Following a deadline of 1 September 2018,
it was no longer allowed to register any cars for which the test
for that specific model had not been conducted yet. Unfortunately,
technicians at German car manufacturers have been kept very busy in
recent years with issues related to the "dieselgate" scandal
(hiding of above-limit emissions). This means that not enough
resources were devoted towards timely execution of these WLTP
tests, which are both numerous (Volkswagen alone had to certify
some 260 different combinations of engines and gear boxes) and more
time-intensive than the previous test methods.
Car manufacturers thus had to "artificially" reduce their car
production in Q3 for sheer lack of parking space for cars they
would not be able to sell after 1 September because customers
(domestic or foreign) would not be allowed to register uncertified
cars. This is despite efforts to find extra parking space, e.g. VW
put almost 10,000 cars on the tarmac of the new Berlin airport
still under construction. In the coming months, as certification
progresses and production activity returns to full capacity, this
effect will gradually unwind - probably until late Q1 2019.
GDP deterioration from 0.5% q/q Q2 to -0.2% in Q3 was also
helped by German vehicle tax being linked to the level of CO2
emissions. The WLTP produces higher CO2 results because the test
procedure is more closely aligned to everyday driving conditions
than the old procedure, where manufacturers had much more leeway to
manipulate. Consumers were thus keen to register a new car before 1
September. Considering the usual delivery times, consumers ordered
at an above-average pace during Q2 already - as vindicated by the
surge in registrations during July-August. Car output in Q2 was
therefore higher than it would have been in the absence of the WLTP
issue, exacerbating the drop in Q3.
The weight of the automobile sector in Germany's producing
sector is about 15%, along with "other transport equipment" even
17%. Hence the production drop in Q3 by 7.4% q/q hurts Germany's
total gross value added and thus GDP by slightly above 0.3%. It is
sometimes argued there should be additional supply-chain effects,
given that "autos + other transport equipment" utilize inputs that
represent about 20% of Germany's manufacturing sector. However,
this would only exacerbate matters if the fall in deliveries from
suppliers is accompanied by disruptions (e.g. layoffs) that go
beyond reduced sales to the car manufacturers - inputs into other
end products are not counted a second time for GDP. That said, with
"autos + other transport equipment" making up some 16% of Germany's
merchandise exports, potential foreign customers may have turned
elsewhere given foreseeable long delivery delays. Overall, the
depressing effect of this technical distortion in the automobile
sector on GDP was roughly 0.4%.
Disruptions caused by low water levels on the
Rhine
Another factor that has played a role (and persists in Q4) is
the low water level on Germany's rivers due to the drought this
year. This pertains especially to the Rhine and its tributaries, as
many commodities used especially by the chemical sector are being
transported in bulk by barge. In recent months, barges could either
load only a fraction of their usual volume or not move at all, and
alternatives such as trucks and trains cannot fully compensate.
Output of chemical and pharmaceutical firms in particular has
therefore also been restrained since August.
Outlook and implications
The above-mentioned factors probably accounted for 0.4-0.5
percentage points in lost GDP growth between Q2 and Q3, which
compares to an overall worsening by 0.65 points. This will lead to
an offsetting rebound in the two subsequent quarters - not just in
Q4, as some of the depressing forces were still ongoing in
October-November. With underlying growth momentum probably at
around 0.3% q/q at present, quarterly German headline growth is
likely to be in the region of 0.5-0.6% q/q in the final quarter of
2018 and the first quarter of 2019 - the latter also helped by
fiscal loosening.
Posted 20 November 2018 by Timo Klein, Principal Economist - Western Europe, IHS Markit