FRANKFURT (MktNews) - The marked slowdown in German growth in the second half of 2000 will make it harder to achieve strong growth in 2001, analysts said Thursday.
Still, the analysts expect no major slowing of German growth this year, with forecasts remaining at or above 2.5%. And if growth in the rest of the eurozone remains strong, they see no additional pressure on the European Central Bank to cut interest rates.
As reported, German real GDP grew 0.2% in the fourth quarter, at the low end of forecasts. Moreover, third quarter GDP was revised down to only +0.3% q/q from the +0.6% originally reported. Fourth quarter consumer spending was weak (+0.1% q/q), equipment investment slowed sharply (+0.4% q/q from +3.1% in 3Q), and net exports subtracted 0.3 percentage point from growth.
There remain questions about the German GDP data. In particular, analysts disagree to what extent consumer spending will pick-up in the first quarter due to the income tax cuts that took effect Jan. 1. Some argue that other tax increases will largely offset the positive impact.
There are also questions about the sharp slowdown in equipment spending in the fourth quarter. While some worry that tax effects will dampen early 2001 investment, others argue that fourth quarter equipment investment has traditionally been weak and so the decline last quarter largely represents a normal seasonal pattern.
Analysts agree that the ECB will watch first quarter data closely for signs of any growth slowdown. But the data so far give no clear picture, since recent sentiment indicators leave room for a rebound.
"The weak German growth in the second half of 2000 makes us more comfortable with our cautious approach to the (German) growth prospects for 2001," according to Hans-Juergen Meltzer of Deutsche Bank in Frankfurt. "Now the growth overhang is lower (from 2000) and growth will have to accelerate more to reach the growth rate of 2.5% that we assume (for this year)," he said. Meltzer called the 0.1% q/q gain in fourth quarter private consumption "disappointing" and sees no strong rebound in the first quarter. "The income tax cut benefits were partly offset by the higher car registration tax, higher heating payments, higher gas prices and so on. But we expect consumption to be stronger in the second quarter," he said.
"Investments in equipment were disappointing and obviously there were no major positive impacts from the lengthening of the write-off periods," he said. Construction investment (-0.9% q/q) is still extremely weak. The extremely high imports in the fourth quarter were mainly caused by high oil prices and the weak euro. But strong exports show that Germany's main export markets are still in a good condition. The focus should not be directed too much to the U.S., which only contribute with about 10%, Meltzer said.
"We do not expect a strong rebound in (German growth in) the first quarter, but the second quarter can be better," he added.
"As long as the French economy stays as strong as it is now, we expect no pressure on the ECB to cut rates," he said. Harald Joerg, economist at Dresdner Bank in Frankfurt, admitted that the bank is now having to review its optimistic 3.0% German growth forecast for this year.
"I cannot give details now, but the low growth in the second half of 2000 means that the growth overhang has been reduced from 1.5% to about 1.25% according to our calculations. Therefore it will be harder now to reach a high growth rate in 2001," he said.
While Dresdner expected private consumption to be weak in the fourth quarter, the bank sees a strong rebound in the first quarter of 2001 because of the effects of the income tax cuts, Joerg said. "The weak equipment investments did not surprise us, since equipment investments have tended to fluctuate sharply for a number of years. While (equipment investment in) the first and third quarters tend to be strong, the fourth quarter tends to be weak," he said.
"In the near term at least we do not expect a change in (ECB) interest rate policy as a consequence of today's figures," Joerg added.
Thomas Mayer at Goldman Sachs in Frankfurt said that the most interesting aspect of the new GDP data is the picture of the transition from a strong German economy in the first half of 2000 to a phase of lower growth in the second half of 2000. (Bundesbank figures show Germany few 2.0% in the first half of 2000 but only 1.0% in the second half).
"The weak second half of 2000 was mainly an effect of the high oil prices," Mayer said. "The relatively weak (private) consumption supports this notion."
"An interesting phenomenon is the high import growth in the fourth quarter. Possibly some businessmen have picked up inventories because they expect higher demand in the first quarter of 2001. But this is only a speculation," Mayer said. "It is also possible that some exporters increased their efforts to enter the German market because of the situation in the U.S., although is traditionally very difficult to enter the German market," he added.
Today's data mean nothing for the growth of 2001, because the slowdown in the second half of 2000 was mainly caused by the high oil prices and this effect should mainly be over by now, said Mayer, who is predicting German growth of 2.5% this year. In addition, the good Ifo retail sentiment figures for January point toward in this direction. "All in all, the current situation should be neutral for the ECB," Mayer said. "While inflation pressures have eased slightly, eurozone growth is still relatively robust. Therefore there is no need for the ECB to act in the near future."