German economy gets off to good Q1, but confidence dips

Booming investment provided the German economy with a healthy kick start into this year, but business confidence in Europe's biggest economy appears to be stalling already, data showed on Friday. The German economy grew by 0.8 percent in the first three months, according to the calculations of the the federal statistics office Destatis. That is the biggest GDP increase in three years. And the momentum came solely from domestic demand, the Destatis said, pointing to a 3.3-percent rise in investment in equipment and a 3.6-percent jump in investment in construction. In addition, consumer spending was up by 0.7 percent and public spending by 0.4 percent. Germany is one of the world's biggest exporters, but net foreign trade -- the balance between exports and imports -- is actually putting the brakes on recovery, knocking a total 0.9 percentage point off the overall growth rate, Destatis said. The strong first-quarter performance had been widely expected, especially because the winter has been so mild, which is positive for outdoor industries such as construction. Analysts have therefore cautioned that the momentum is unlikely to be sustained. And the latest sentiment indicators back this up. - Confidence indicators stall - Last week, the ZEW investor confidence survey fell unexpectedly sharply in May. And on Friday, the even more closely watched Ifo business climate index fell this month instead of holding steady as analysts had predicted. Ifo chief Hans-Werner Sinn said that companies are no longer as positive about either their current business or the outlook for the next six months. "A lull was seen in the German economy in May," he said. Nevertheless, most analysts believe the German recovery has not come off the rails just yet, even with the situation in Ukraine and the potential fallout for the euro area remaining a big unknown. "The Ifo business climate has dropped far more than expected this month, but this setback doesn't mean the German economy is changing course," said Commerzbank chief economist Joerg Kraemer. "For one thing, the GDP data show that the German corporate sector is finally investing more," he said and he believed they would continue to do so, given the very low level of interest rates. "Germany's near-term economic recovery prospects remain quite good," agreed Timo Klein at IHS Global Insight. "The ECB is expected to keep monetary policy very soft until late 2015, probably even introducing some further loosening measures in June. "Financing conditions will thus remain very favourable in Germany for a considerable period. In addition, it needs to be kept in mind that the euro, despite having strengthened modestly since mid-2012, is still at quite competitive levels for Germany's export industry," Klein said. - Uptrend still intact - Jennifer McKeown at Capital Economics took a more cautious view. "The breakdown of German GDP for the first quarter confirmed that the strong quarterly gain was partly down to temporary factors. And the renewed fall in the Ifo business climate index in May suggested that the recovery may now be slowing," she said. Stefan Kipar at BayernLB said he was now pencilling in slower growth for the second quarter. "The strength of the first quarter was exaggerated by weather effects, which will fall away in the second quarter," he said. "In addition, uncertainty about the situation in Ukraine is weighing somewhat on export-orientated sectors," the expert said. Nevertheless, the upward trend "remains intact," Kipar said. "The clouding of sentiment is more a process of normalisation following the very sharp increases seen in the first quarter," he said.