GDP growth speeds up in the third quarter

GDP growth strengthens in Q3: GDP growth sped up to 1.4% year on year from 0.7% in the second quarter. Rising external demand chiefly supported the improvement. On a seasonally adjusted quarter-on-quarter basis, economic growth edged up to 0.3% in Q3 (Q2: +0.1% qoq s.a.).

Domestic demand weakens, but net exports recover: The annual upturn chiefly reflected a recovery in net exports. Exports of goods and services increased 8.4% on an annual basis in Q3 (Q2: -0.3% yoy), as goods exports returned to growth and services exports rebounded. In addition, imports of goods and services growth rose 6.5% in Q3 (Q2: +4.7% yoy). Looking at domestic activity, household spending grew 1.9% in Q3 (Q2: +2.0% yoy), marking the weakest expansion since Q4 2023: Persistent consumer pessimism weighed on consumption despite lower inflation in the quarter and stronger real wage growth in July–August compared to Q2. Moreover, government consumption growth moderated to 9.1% in Q3 (Q2: +12.6% yoy). Meanwhile, fixed investment contracted 8.2% in Q3 (Q2: -1.5% yoy), marking the worst reading since Q2 2020. The largest declines were in investment in buildings and structures plus machinery and equipment.

GDP growth to pick up in 2025, but downside risks loom: Looking ahead, GDP growth should strengthen through Q4 2025. As a result, 2025’s full-year growth will rise above 2024’s projected level thanks to accelerations in private spending, fixed investment and exports. That said, cooling public spending growth will cap the improvement. Downside risks stem from a prolonged malaise in Germany’s automotive sector, weaker-than-expected economic activity in the broader EU and protectionist U.S. policies hitting industrial activity and exports.

Panelist insight: Analysts at the EIU commented on the outlook: “We estimate that economic growth will have slowed in 2024 to 1.5%, but forecast a moderate improvement in 2025 to 1.8%. […] Growth in 2025 will be supported by household expenditure, which should improve in line with continued real wage growth, moderating inflation and falling interest rates. However, the economy will be constrained by more moderate government spending after substantial increases in the first half of 2024, and slower export growth due to poor demand in key trading partners in western Europe, including ongoing weakness in German automotive exports.”

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