The economic situation in Germany in July 2023¹

• The economic situation in the early summer continues to be characterised by a high level of uncertainty and by data pointing in different directions. Whilst the external economic environment has remained weak, some domestic economic indicators are now pointing towards a stabilisation. Overall, the economic development in the second quarter is likely to have been very restrained.
• The latest data on the economic indicators, particularly on new orders and industrial output, point to a moderate underlying economic performance following a significant cooling towards the end of the first quarter. Although business sentiment has worsened, the current stabilisation of demand is suggestive of a gradual recovery of the industrial economy in the coming months.
• Retail sales (excluding motor vehicles) improved slightly in May compared with the previous month, for the second time in succession. However, consumers continue to be uncertain. Over the coming months, consumer spending is not expected to trigger significant growth in real terms.
• The upward trend in consumer prices picked up some speed again in June, with the inflation rate standing at 6.4% (May: +6.1%). The core inflation rate also rose by 0.4 percentage points to 5.8%. However, following the declining trend since March, this is mainly due to one-off effects relating to the relief provided by the state a year ago (9-euro monthly public transport ticket, reduction in motor fuel duty).
• Whilst the labour market appeared to be unaffected by the difficult cyclical situation for a long time, the situation worsened appreciably in June in the wake of the weaker economic performance. Registered unemployment continued to rise, and employment declined. In view of the ongoing skills shortage, however, no sharp rise in unemployment is likely.
• In April 2023, the number of insolvencies was 14.4% up in year-on-year terms according to official statistics. Current leading indicators are showing a sharp year-on-year rise for June (Halle Institute for Economic Research: 48.1%). According to the institute’s Bankruptcy Update, the number of insolvencies of partnerships and corporations has risen to the highest level since 2016. However, the coming months are expected to see a slight fall. Overall, the trend shows a continuous rise since mid-2022, albeit from a very low level.
• Generally, falling prices on the global energy markets, slowing inflation, higher wage agreements and the expected global economic recovery all point to a moderate recovery of the German economy in the rest of the year.

RESTRAINED ECONOMIC DEVELOPMENT IN THE EARLY SUMMER

The German economy is continuing to operate in a difficult environment in the early summer of 2023. The overall global situation remains weak in view of the persistent geopolitical tensions and the increasing effects of monetary tightening by many central banks. Initial stabilisation tendencies are being seen in industrial output, but the ongoing weak global demand and muted domestic sales prospects are likely to continue to prevent a stronger recovery. In particular, value creation in the energy-intensive sector is still falling, despite the drop in energy prices, and this is probably partly due to weak foreign demand.
Negative effects on the domestic economy are continuing to derive from the losses of purchasing power due to the high, albeit falling, level of inflation, which is impacting consumer spending. The higher collective wage and salary agreements, coupled with the use of the inflation compensation bonus, are however clearly reducing the falls in real wages and are likely to feed through to the retail trade and other consumer-related sectors.
Another factor affecting economic development is the rise in interest rates, which is impacting investment. In particular, there are signs of significant declines in demand in the construction sector, which is vulnerable to rising interest rates.
As a consequence of these challenges, it seems likely that the overall cyclical development in the current quarter will be muted. A stronger economic recovery is not expected until there are signs of a tangible uptick in the global economy and of purchasing power increases due to falling inflation and higher wage rises.

GLOBAL TRADE REMAINS SLUGGISH

Global industrial output fell further in the reference month of April compared with the preceding month ( 1.4%), and world trade was also down 1.4%. Leading indicators for world trade are mainly sending positive signals, but Europe is likely to benefit less from the expected upturn. The RWI/ISL Container Throughput Index rose slightly in the reference month of May, from 122.3 to 123.4 points, suggesting that there will be a moderate (seasonally adjusted) pick-up in world trade. There was a particularly large increase in activity in Chinese ports. However, the Nordrange Index dropped from 108.4 in April to 104.1 for Europe. According to shipping movement data from the Kiel Trade Indicator, world trade is likely to pick up some speed in June.
The IMF is expecting average global economic growth of around 3% a year in the coming years, i.e. a below-average development in the historical comparison. According to the current forecast average by Consensus Economics, economic activity in key German trading partners is likely to see a restrained increase (eurozone: +0.6%, USA: +1.3%). In contrast, Asia is likely to experience a stronger boost to the global economy.

DETERIORATION IN THE OUTLOOK FOR FOREIGN TRADE

Nominal exports of goods and services dropped in May by -1.3% month on month in seasonally adjusted terms (April: +1.2%). In the two-month comparison, which is less susceptible to fluctuations, they fell by 1.5%. Exports of goods to EU and non-EU countries developed in opposite directions: shipments to the EU fell by 1.5%, whilst deliveries to third countries rose by 1.5%. The economic slowdown in the U.S. was reflected in lower exports from Germany; in contrast, demand from China and the UK rose. Nominal exports of goods and services declined by 0.1% in May compared with April 2023, and the two-month comparison even saw a fall of 1.8%. Deliveries of goods from the EU rose by 3.5%; a little less was imported from other countries in May ( 0.3%).
In view of the better performance of imports compared with exports, the monthly trade surplus recently shrank to some extent – from €13.5 billion in April to €11.6 billion in May.
The foreign trade prices are continuing to reflect the lower energy and raw materials prices and the improvement of the supply chain situation. The terms of trade improved in May, up +1.0% from the previous month, since prices of imports again fell more strongly ( 1.4%) than prices of exports ( 0.4%). In real terms, the decline in exports in May is therefore likely to have been somewhat weaker, and imports are expected to have seen a slight increase in real terms.
The leading indicators are currently providing a mixed picture of the future development in exports. The sentiment indicator of S&P Global has been above the 50-point growth threshold since February, but it fell in June by 1.7 points to a value of 52.7. The mood has deteriorated somewhat both in the more export-oriented industrial sector and amongst the service providers. ifo export expectations also worsened in June, at a balance of 5.6. In May, the indicator had already dropped from a brief high point in April to +1.0. This means that export expectations were only slightly on the positive side on balance in the second quarter, indicative of no more than a restrained increase. The Kiel Trade Indicator is currently signalling a slight fall in German exports (in real terms) for June.

FURTHER STABILISATION OF INDUSTRIAL OUTPUT AND CLEAR RISE IN DEMAND

According to the Federal Statistical Office, output in the goods-producing sector declined by 0.2% in May as compared to the previous month after a rise of 0.3% in April. While industrial output rose again slightly by 0.2% in May after the perceptible increase in the preceding month (revised upwards from +0.1 to +0.5%), especially the sharp drop of 7.0% in the energy sector had a dampening effect. The construction industry also registered a decline of 0.4% after a rise in the preceding month.
Within industry, the individual sectors saw differing developments in May. The important automotive and automotive parts sector reported an increase (+4.9%), while the similarly large mechanical engineering sector recorded a drop (-0.5%). The manufacture of pharmaceutical products saw a particularly sharp decline (-13.1%). The majority of the particularly energy-intensive sectors of the economy also recorded a fall again (-1.4%), with declines in the fields of the manufacture of chemical products (-0.5%), metal production and processing (-1.5%), glass, glassware and ceramics (-3.1%) and coking and oil processing (-10.5%) and rises in the fields of paper and cardboard (+1.2%) and metal products (+0.1%).
New manufacturing orders rose clearly in May from the preceding month, by +6.4%, following a sharp drop in March ( 10.9%) and a flat April (+0.2%). As in April, the monthly comparison of new orders was greatly affected by fluctuations in large orders; excluding them, the rise was only +3.2%. The growth was distributed equally across domestic and foreign demand: following falls in March and April, orders from abroad increased appreciably again (+6.4%), with a particularly clear rise in demand from the eurozone (+6.5%). Domestic orders also rose significantly again in May (+6.2%).
Industrial production thus continued to stabilise and in May again reached its average level of the first quarter of 2023. Consumer goods and capital goods registered increases, while the figure for intermediate goods is not yet back at the level of the first quarter. Although business sentiment has worsened, the current stabilisation of demand points to a recovery – albeit only moderate – of the industrial economy in the coming months.

RETAIL TURNOVER CONTINUES ITS SLIGHT RISE, BUT CONSUMER SENTIMENT REMAINS RESTRAINED

Retail sales (excluding motor vehicles) improved slightly in May compared with the previous month, for the second time in succession. They rose by 0.4% in May, following an increase of 0.7% in April. Compared with May 2022, however, the retail sector reported a (real) decline in sales of 3.6%, and this mainly reflects the high price increases. In May, trade in foodstuffs registered a decline in turnover of 1.4% compared with the preceding month, but was down much further, by -4.3%, on the same month the year before. In year-on-year terms, this means that food retail turnover has been declining for 23 months in a row. Although food prices fell by 0.3% in May compared with the previous month (June: -0.2%), the year-on-year increase was still very high, reaching +14.9% (June: +13.7%). Food remains the strongest driver of consumer prices. Online and mail-order trade shrank by 3.1% in May (-6.8% down on the same month the year before).
The number of new registrations of passenger cars by private owners fell by 1.6% in June, after rising by 2.9% in May. This development was probably still influenced by the reduced government funding provided for e-vehicles.
The leading indicators of consumer sentiment are suggestive of a restrained development. According to the GfK forecast, consumer sentiment will have a minor setback in July, after it had previously improved eight times in succession from an extremely low level. The ifo retail business climate deteriorated slightly again in June following improvements in the preceding months. Here, business expectations remain deeply negative. This means that the leading indicators suggest that no major growth stimulus will derive from consumer spending in real terms in the coming months. Consumers remain uncertain, and their purchasing power is still being affected by the high inflation rate.

INCREASED INFLATION RATE DUE TO ONE-OFF EFFECTS

The rate of inflation (year-on-year rise in the price level) increased slightly to +6.4% in June (May: +6.1%). Following the falling trend since March, base effects are responsible for this rise: between June and August 2022, the tax cut for motor fuel and the 9-euro public transport ticket caused a temporary drop in inflation. The disappearance of these concessions means that the year-on-year rise in the price level appears to be higher. The core rate (excluding energy and foodstuffs) rose to 5.4% in June (May: +5.4%; monthly increase: +0.4%).
Food prices again rose disproportionately compared with the same month a year ago (+13.7%), although upward pressure on prices continued to ease (May: +14.9%, April: +17.2%). At +3.0%, energy prices rose by much less in year-on-year terms in June than the overall index. This is because energy prices on the world markets have declined significantly from 2022 levels and the high energy price increases resulting from Russia’s attack on Ukraine have not been a factor in the year-on-year comparison since March (base effect). In addition, the measures of the third relief package have had a dampening effect.
Price pressure from energy sources has recently increased slightly again. Prices for natural gas rose on the spot markets, but at €34/MWh, TTF Base Load is still 62% down on last year, and 5% down on the previous month. After peaks of over €300/MWh in August 2022, the ongoing energy savings, the predominantly mild weather and the relatively high gas storage levels contributed to this. However, market expectations suggest that natural gas prices will rise again to around €50/MWh in the coming quarters. The futures prices are not likely to settle back at pre-crisis levels until 2027.
In view of the development in energy prices, the upstream stages of the economy are seeing less price pressure. Producer prices only rose by 1.0% in year-on-year terms in May (April: +4.1%). This means that producer price inflation was lower than at any time since January 2021. Producer prices fell compared with the preceding month ( 1.4%). Import prices fell sharply in May, by 9.1% in year-on-year terms ( 1.4% down from the preceding month). Wholesale selling prices also decreased in May, in comparison both with the preceding month ( 1.1%) and the preceding year ( 2.6%).
The coming months are expected to see high but declining inflation. Price-drivers on the supply side, e.g. supply chain disruption or the passing on of previous price increases, will continue to diminish, whilst the monetary tightening will slow the demand side. However, from July there is likely to be a further upward base effect due to the abolition of the EEG surcharge from July 2022. Also, from October 2023 to March 2024, the reduction in VAT on gas and district heating a year before is likely to feed through into the figures. According to the current range of forecasts by the institutes, inflation is likely to amount to 5.5 - 6.0% this year, and to 2.0 - 3.1% in 2024.

WEAK ECONOMIC PERIOD INCREASINGLY FELT ON THE LABOUR MARKET

June saw a tangible worsening of the situation on the labour market as a result of the weak economy: registered unemployment rose by 28,000 in seasonally adjusted terms. An increase on this scale in June is unusual: normally, the spring pick-up results in a drop. The figures are not driven by refugee flows: the rise is primarily due to the economic development. Gainful employment fell slightly by 1,000 people in May (seasonally adjusted); employment subject to social insurance payments stagnated in April (+0 persons, seasonally adjusted). This marks an end for the time being to the sharp upturn in employment seen in recent months. In contrast, short-time work was down further. The leading indicators from the Institute for Labour Market Research (IAB) and ifo deteriorated further in June. Only the services sector is planning to recruit more people; industry and trade are expecting to see falls. The number of reported vacancies also fell. It is still at a high level, because companies are finding it difficult to recruit suitable staff. This means that the weak economy is now impacting on the labour market for the first time. A recovery is not expected until the economy picks up speed again. But there is no likelihood of a sharp rise in unemployment. Companies are adjusting to a situation in which the skills shortage will worsen in the medium term due to demographics, digitalisation and decarbonisation. The number of reported vacancies stood at 769,000 in June, remaining at a very high level in the longer-term comparison. At the same time, the long vacancy period, i.e. the time between the desired recruitment date and the departure of the previous employee, reflects the difficulties of many companies in finding (skilled) workers quickly.

INSOLVENCIES ALSO AT AN ELEVATED LEVEL IN SPRING 2023

According to the official insolvency statistics, corporate insolvencies increased by 17.2% year-on-year in the first four months of 2023, amounting to a total of 5,545. In April 2023, there were 1,428 insolvencies of businesses, which was 14.4% up on April 2022.
The trend in the rate of insolvencies has kept rising since the second half of 2022, albeit starting from a very low level. The implications of the war against Ukraine, the temporary sharp rise in energy prices and the persistent high inflation rates are a major burden for many companies, and it is difficult to assess their impact in terms of future insolvencies in the coming months.
As a leading indicator, the number of regular insolvencies filed gives an indication of the future development of corporate insolvencies. According to preliminary data from the Federal Statistical Office, these rose by 2.2% June 2023 compared with May 2023, and by 13.9% in year-on-year terms. According to the Halle Institute for Economic Research’s Bankruptcy Update, the number of insolvencies of partnerships and corporations has risen to the highest level since 2016. The number of insolvencies of partnerships and corporations stood at 1,050 in June, 48.1% higher than in June 2022. However, the coming months are expected to see a slight fall.

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¹ This report is based on data that was available as of 13 July 2023. 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.