German economy contracts on weak foreign trade, auto bottleneck

The German government had flagged a weaker third quarter last month, citing bottlenecks in the car sector. (AFP)
Updated 14 November 2018
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German economy contracts on weak foreign trade, auto bottleneck

  • The third-quarter dip in GDP was the first time the economy has contracted since the first quarter of 2015
  • Investors do not expect the German economy to recover rapidly from a weak patch in the third quarter

BERLIN: The German economy contracted for the first time since 2015 in the third quarter as global trade disputes swung the traditional export growth engine of Europe’s largest economy into reverse, raising concerns that a near-decade-long expansion is faltering.
Gross domestic product (GDP) in Europe’s biggest economy contracted by 0.2 percent quarter-on-quarter, the Federal Statistics Office said on Wednesday. That compared with a Reuters forecast for a contraction of 0.1 percent.
Compared with the same quarter of the previous year, the economy grew by 1.1 percent from July to September, calendar-adjusted data showed. Analysts polled by Reuters had expected 1.3 percent.
“The slight decline in GDP compared to the previous quarter was mainly due to foreign trade developments: provisional calculations show there were fewer exports but more imports in the third quarter than in the second,” the Office said.
The third-quarter dip in GDP was the first time the economy has contracted since the first quarter of 2015.
The government had flagged a weaker third quarter last month, citing bottlenecks in the car sector stemming from the introduction of new pollution standards known as WLTP as a factor.
“Germany doesn’t have an economic problem but rather an auto sector problem. Due to the sluggish certification of cars, car production had to be noticeably reduced, with collateral damage for other sectors too,” said Andreas Scheuerle at DekaBank.
However, the ZEW research institute said on Tuesday that investors do not expect the German economy to recover rapidly from a weak patch in the third quarter.
Concerns are growing in the German economy, which is in its ninth year of expansion, about the impact of global trade disputes and Britain’s departure from the European Union.
In addition to angst about the impact of US President Donald Trump’s abrasive trade policy, German firms are concerned about instability at home where Chancellor Angela Merkel’s awkward ‘grand coalition’ has come close to collapsing twice.
Carsten Brzeski, an economist at ING, said that even though he expected the auto sector to rebound in the fourth quarter, the GDP figures for the July-September period were a “wake-up call that political stability and strong growth are by no means a given.”
“The poor export performance, despite a weak euro exchange rate, suggests that trade tensions and weaknesses in emerging markets could continue to weigh on Germany’s growth performance,” he said in a research note.
Last month, Germany’s DIHK Chambers of Industry and Commerce cut its 2018 growth forecast to 1.8 percent from 2.2 percent and predicted a slowdown to 1.7 percent next year as the economy faces mounting risks at home and abroad.


Dubai real estate market recovery to be seen as of 2022: S&P

Updated 20 February 2019
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Dubai real estate market recovery to be seen as of 2022: S&P

  • The outlook on property was part of a challenging assessment of the credit-worthiness of the emirate
  • S&P was generally comfortable with the credit ratings of the emirate’s banking system

DUBAI: S&P Global, the ratings agency, painted a grim picture for the real estate sector in Dubai, with a meaningful recovery in property prices expected only after 2022.
At a presentation to journalists in the Dubai International Financial Center, S&P analyst Sapna Jagtiani said that under the firm’s “base case scenario,” the Dubai real estate market would fall by between 5 and 10 percent this year, roughly the same as the fall in 2018, which would bring property prices to the levels seen at the bottom of the last cycle in 2010, in the aftermath of the global financial crisis.
“On the real estate side we continue to have a very grim view of the market. While we expect prices to broadly stabilize in 2020, we don’t see a meaningful recovery in 2021. Relative to the previous recovery cycle, we believe it will take longer time for prices to display a meaningful recovery,” she said.
S&P’s verdict adds to several recent pessimistic assessments of the Dubai real estate market. Jagtiani said that conditions in the other big UAE property market, in Abu Dhabi, were not as negative, because “Abu Dhabi never did ramp up as much in 2014 and 2015 as Dubai.” S&P does not rate developers in the capital.
She added that a “stress scenario” could arise if government and royal family related developers — such as Emaar Properties, Meraas, Dubai Properties and Nakheel — which have attractive land banks and economies of scale, continue to launch new developments.
“In such a scenario, we think residential real estate prices could decline by 10-15 percent in 2019 and a further 5-10 percent in 2020. In this case, we expect no upside for Dubai residential real estate prices in 2021, as we expect it will take a while for the market to absorb oversupply,” she said.
S&P recently downgraded Damac, one of the biggest Dubai-based developers, to BB- rating, on weak market prospects.
However, Jagtiani said that, despite the “significant oversupply” from existing projects, several factors should held stabilize the market: Few, if any, major product launches; improved affordability and “bargain hunting” by bulk buyers; and a resurgence of Asian, especially Chinese, investor interest in the market.
Jagtiani also said that government measures such as new ownership and visa regulations and reduction in government fees could help prevent prices falling more sharply, as well as “increased economic activity related to Dubai Expo 2020, which is expected to attract about 25 million visitors to the emirate.”
The outlook on property was part of a challenging assessment of the credit-worthiness of the emirate. “In our view, credit conditions deteriorated in Dubai in 2018, reducing the government’s ability to provide extraordinary financial support to its government related entities (GREs) if needed,” S&P said in a report. “The negative outlook on Dubai Electricity and Water
Authority (DEWA) partly reflects our concern that a real estate downturn beyond our base case could out increased pressure on government finances,” the report said.
It pointed out that about 70 percent of government revenues come from non-tax sources, including land transfer and mortgage registration fees, as well as charges for housing and municipality liabilities, as well as dividends from real estate developers it controls, like Emaar and Nakheel.
S&P was generally comfortable with the credit ratings of the emirate’s banking system, which has an estimated 20 percent exposure to real estate. “Banks in the UAE tend to generally display a good level of profitability and capitalization, giving them a good margin to absorb a moderate increase in risks,” the report said.