The economic situation in Germany in December 2021¹

• In view of the current situation with regard to the pandemic, the cyclical risks have recently increased again. Overall, economic output is likely to prove rather weak in the final quarter of the year. Whilst the contact-intensive services sectors are being affected by new restrictions like requirements that customers be fully vaccinated or recovered, the industrial sector is continuing to suffer from shortages of intermediate goods. However, the worst of these shortages is likely to be over in the near future.
• Industrial output increased in October.
  There were sharp increases in particular in the important sectors of cars and car parts and in mechanical engineering. Both branches of industry have been particularly affected for months by shortages of semiconductors in particular. However, output remains below the pre-crisis level and the outlook is restrained.
• Retail sales fell again in October, but again remained above their pre-crisis levels from February 2020. However, the confidence of consumers and traders has recently taken another hit due to the current development in the pandemic and high prices.
• The inflation rate rose to 5.2% in November, but this was partly due to a base effect. Special factors have significantly raised the inflation rate since the beginning of the year. The middle of the year saw an expected leap in the rate due to the temporary cut in value added tax rates from 1 July 2020.
• The fourth wave of the pandemic has not really been felt on the labour market so far; the recovery is continuing. In November, unemployment fell once again, with levels of gainful activity continuing to see a positive development in October (all in seasonally-adjusted terms). The level of short-time work remained virtually unchanged in September (0.8 million people), but the number of notifications has risen.
• In 2021, the number of corporate insolvencies is expected again to be lower than in the previous year, reaching a new record low. From January to September, there were only 10,682 corporate insolvencies – 14.5% fewer than in the same period last year – and there are also no signs of major increases in the figures this autumn. It is also not expected that there will be a sudden rise in the coming year.

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¹ This report is based on data that were available as of 10 December 2021. Unless stated otherwise, these are rates of change against the respective preceding period on the basis of price-adjusted figures which have also been adjusted for calendar-day and seasonal variations.

RATE OF INFECTIONS HITTING ECONOMIC RECOVERY
The German economy is preparing for a tough Covid-19 winter. Economic output rose by a further 1.7% in the third quarter, but the fourth quarter is only expected to see a weak GDP performance. The reason for this is the rate of infections, which will probably have a renewed negative impact on the services sector after the recovery in the summer. Restrictions, such as rules that customers must be fully vaccinated or recovered, and regional restrictions are affecting the hotel, restaurant and catering industry and – to a lesser extent – the retail trade. Industry is continuing to suffer from supply shortages and high procurement costs. This has been slowing the rate of production during this year – even though there are plenty of orders on the books. The fact that manufacturing output improved again in October following a mixed summer offers a first glimmer of hope. The important automotive sector has – according to statements from the business association – increased its output over the last three months, with double-digit rates of increase in each month. This is a first sign that the companies are learning to cope with the supply problems, e.g. by reorganising their procurement. If the supply bottlenecks are gradually overcome next year, the economic recovery will accelerate significantly.

Recent figures show that the inflation rate has continued to rise. The shortages of raw materials and intermediate products, and high energy prices, are continuing to be felt. Next year, it is expected that there will be a noticeable drop in the inflation rate, as significant special factors such as the temporary reduction in sales tax rates and the sharp rise in world market prices for raw materials will no longer feature in the year-on-year comparison. This assessment is shared by the vast majority of economic experts, as evidenced by the current range of forecasts.

The recovery of the labour market continued, albeit with reduced momentum. Gainful employment continued to develop positively and unemployment again dropped noticeably. Short-time work remained at a constant level, although supply bottlenecks and the recent restrictions have led to an renewed increase in notifications of short-time work in the manufacturing sector and the hotel, restaurant and catering industry. Leading indicators suggest that the upturn on the labour market will continue at a slower pace in the coming months.

GLOBAL ECONOMY CONTINUING TO BE AFFECTED BY SUPPLY ISSUES
The global economy is continuing to suffer from shortages in the supply of key intermediate goods and raw materials. Both global industrial output and global trade fell between the second and third quarters (by 0.2% and 1.1% respectively). Global output was scaled back in the developing and emerging economies in particular, whilst it held up fairly well in the industrial countries. The latest figures (for September) show a further slight deterioration in global industrial output and global trade. However, business sentiment is relatively stable. In November, the J.P. Morgan/IHS Markit composite purchasing managers’ index actually rose by 0.3 points, reaching 54.8 points. And the indexes for the services sector and industry are also well above the growth threshold of 50 points, at 55.6 points and 54.2 points respectively.

FOREIGN TRADE STARTS FOURTH QUARTER WITH SHARP EXPANSION
Exports of goods rose by 3.3% between September and October in seasonally adjusted terms and in current prices (September: +1.5%). This clear increase offset the falls seen in August (+1.8%). The two-month comparison shows growth of 2.2%. Against the background of a moderate rise in export prices, exports also rose appreciably in price-adjusted terms. There was a third successive higher nominal and seasonally adjusted rise in imports of goods in October (3.0% after +2.3% in September). The rate of increase is even higher in the two-month comparison (+4.6%). In view of sharply rising import prices, however, the price-adjusted increase in imports was probably smaller.

The leading indicators for foreign trade and investment at national level reflect the current gap between supply and demand. New orders from abroad did fall by 13.1% between September and October – primarily due to a smaller volume of large orders – but this considerable decline started from the second highest level seen since 1991. The ifo export expectations show that the manufacturing industry is having problems coping with demand. In November, the index only recovered slightly from the clear drop in the preceding months, and is back at the February level. Fewer than one fifth of companies currently expect things to improve by February 2022. Despite problems due to the supply bottlenecks, the general outlook for German foreign trade remains positive in view of the large order reserves.

DESPITE A SHARP EXPANSION IN OUTPUT, THE OUTLOOK FOR INDUSTRY REMAINS RESTRAINED IN VIEW OF THE SUPPLY BOTTLENECKS
Output in the manufacturing sector rose by 2.8% between September and October. Industrial output increased by 3.2%, whilst construction sector output rose by 1.2%. New manufacturing orders fell by 6.9% between September and October. Demand for capital goods in particular declined disproportionately, by 10.7%. In the two-month comparison, the volume of new orders fell by 6.2%. The October figure was slightly below that of the preceding year ( 1.0% from Oct. 2020). Overall, the level of new orders is highly volatile at present. After it had risen to an all-time high in the middle of 2021, the index has shed more than 16 points in the last few months. The very volatile development in large orders is impacting the data. If they are excluded, the decline in new orders was only 1.8% in October.

Industrial production has been hit by supply bottlenecks affecting key upstream goods and raw materials since the beginning of the year. As a result, output was cut back in the summer months, significantly so in some cases. In the tense cyclical situation, the bounce back in October represents a normalisation from the preceding falls, even if the shrinkage in output seen from the beginning of the year has yet to be offset, and the supply problems are continuing in many areas. The sharp increases in the important sectors of cars and car parts (+12.6%) and in mechanical engineering (+5.0%) are encouraging. Both branches of industry have been particularly affected for months by shortages of semiconductors in particular. Starting from a low level, they did see some improvement. Figures were also up in the fields of the manufacture of other transport equipment (+8.2%) and data processing equipment (+3.4%). In contrast, there were falls in the areas of chemical and pharmaceutical products (-4.0% and -3.7% respectively).

However, the future outlook for the industrial sector remains restrained. This is suggested by the latest indicators of sentiment. The industrial sector is likely to continue to suffer from the supply shortages for some time to come, with improvements only being seen in the course of next year.

SLIGHT DROP IN RETAIL TURNOVER
Retail sales (excluding vehicles) fell slightly by 0.3% between September and October, following a clear fall in September. Sales of textiles, clothing, footwear and leather goods did record a 5.4% rise in October, following a fall in September, but remained significantly below the pre-crisis levels of February 2020 (-3.5%). Internet and mail order sales registered a rise of 4.9%, exceeding the pre-crisis level by a substantial margin (+32.9%). There was a considerable increase of 6.4% in new car registrations by private owners in November, following a 3.4% drop in the preceding month.

Looking ahead to the coming months, it must be borne in mind that consumers and traders are probably suffering from uncertainty in view of the current development in infections and of rising prices. The ifo figures for business expectations in the retail sector worsened on balance again in November, falling for the fifth month in succession. The GfK’s consumer sentiment index also suggests that the situation will deteriorate. A sharp fall to a clearly negative area of the indicator is expected in December. The prospects for sales in the Christmas period are suffering from the persistently high rate of infections and high inflation rates.

The consumer price level did fall by 0.2% in November compared with the previous month (October: +0.5% each). However, the inflation rate, i.e. the year-on-year development of the price level, increased in November by 0.7 percentage points to 5.2%, the highest figure since June 1992. To a small extent, the rise in the rate of inflation is partly due to a base effect, since the consumer price index had fallen by 0.3% in November 2020 from the previous month. In July of this year, the inflation rate rose suddenly as expected, by 1.5 percentage points. This sudden surge from the middle of the year was the result of a base effect caused by the temporary reduction in VAT rates in the preceding year. In other words, the current consumer prices – which include the regular VAT rates – are being compared with prices that were subject to reduced VAT rates. Reasons for the increase in the inflation rate in the first months of this year include the recovery in import and raw materials prices, and the introduction of carbon pricing. Once these special effects cease to exert their influence at the end of the year, the upward trend in consumer prices is likely to weaken considerably. Also, the shortage of upstream goods such as semiconductors is likely to push prices up. The situation is expected to improve incrementally in the course of 2022. The core inflation rate (excluding energy and foodstuffs) stood at 3.3% in November (October: +2.9%), reaching its highest level since January 1994. Energy prices recently saw a marked increase of 22.1% in year-on-year terms (September: +18.6%). Current developments on the commodity markets, however, suggest that the oil price will ease in the medium term. For foodstuffs, the latest annual rate was 4.5% (October: 4.4%).

RECOVERY ON THE LABOUR MARKET IS CONTINUING.
Positive development on the labour market has continued. The fourth wave has not really had an impact so far. Unemployment and underemployment dropped further in November, by 34,000 each in seasonally adjusted terms. According to the unadjusted figures, unemployment fell sharply by 60,000 to 2.32 million people. Compared with the same month in the previous year, the number of unemployed persons was down by 382,000. There was also a positive development in gainful employment and jobs subject to social security contributions. Gainful employment rose by 34,000 in October in seasonally adjusted terms. According to the unadjusted figures, there were 45.3 million people who were gainfully active, which is an increase of 289,000 year-on-year. In September, employment subject to social security contributions increased by 46,000 persons compared to the previous month. According to projections by the German Federal Employment Agency, the number of people in short-time work was virtually unchanged (0.8 million people). The number of people in short-time work is expected to have remained steady in October. However, the number of notifications has risen, firstly in the manufacturing sector due to persistent supply problems, and secondly in the hotel, restaurant and catering industry due to the recent restrictions.

Demand for labour continued to increase. The leading indicators published by ifo and the Institute for Employment Research (IAB) differed for November: the ifo employment barometer showed a very small rise; in contrast, the IAB labour market barometer fell, but remained at a high level. The coming months are likely to see a continuation of the positive development, although the amount of short-time work may well increase.

RATE OF INSOLVENCIES CONTINUING TO FALL
From January to September, the local courts recorded 10,682 corporate insolvencies. This is 14.5% down on the previous year. Even if the German Economic Institute (IW) in Halle’s insolvency trend points to a slight rise in insolvencies, the number of corporate insolvencies in 2021 as a whole will probably once again be below the previous year's figure, reaching a new all-time low. It currently seems unlikely that next year will see a sharp rise, although the level of uncertainty about the future course of the pandemic has worsened due to the new Omicron variant.