The German economy, the leading element in the EU’s welfare, found its footing in Q1, thanks to increased consumer spending and a recovery in construction. However, the EU’s government warned that the outlook for further expansion could be overshadowed by heightening trade tensions.

Quarterly increase in German output was 0.4%. In annual terms, GDP grew by 0.7% in the first quarter comparing to the same period last year. Data was in line with market consensus.

Germany was on the verge of a technical recession in 2018 as quarterly GDP posted negative and zero growth in Q3 and Q4, respectively.

In the first quarter of 2019, consumer spending and investment in fixed assets in the construction and industrial sectors rose significantly. In contrast, government spending declined. Data on exports and imports couldn’t shed any further light on the impact of trade conflict on the German economy. Both exports and imports increased compared with the previous quarter.

The government, in its recent report, predicted considerably slower growth in 2019 –at just 0.5%. In 2017 and 2018, the German output rose by 2.2% and 1.4%, respectively.

The data on the Chinese economy for April was extremely weak, re-emphasizing the need to focus on the trend and not be tempted to believe in “outliers”. April’s slowdown rebuked hopes for an extension of March’s optimism, where the market saw a rebound in activity in the industrial sector and foreign trade. As shown below, March’s glimmer of hope could be dashed.

Capital expenditures, industrial production and retail sales slowed down the pace of growth significantly in April. The government’s growth bet focuses on subsidized housing and infrastructure projects, which highlight the growth of investment in housing from the main economic indicators. Its rate remains steadily high thanks to state funding guarantees.

As for the March data, it could overstate the outlook for recovery due to two reasons:

  1. The VAT reduction, which came into force on April 1. Exporters could accelerate the shipments of goods to get an increase in tax deduction. This could be followed by a compensatory decline in April.
  2. A trick in composing the statistics. Measuring YoY growth for March could be strong when we make YoY comparisons. Please note that the 2018 Lunar New Year had a bigger negative impact on March 2018 than on March 2019.

The main accent in investment has shifted to housing, as the rate of return on investment in production expansion has fallen, and risks jumped higher:

The question is: where is the limit of composure of the Chinese government?

Risk Warning: Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

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