The economic situation in Germany in April 2024

INDICATIONS THAT THE ECONOMIC TIDE IS TURNING

While the latest short-term economic indicators are showing a mixed picture, they point to a gradual stabilisation of the economy. Since the start of this year, industrial output – particularly in the energy-intensive industries – has recovered palpably and output in the construction sector has seen a strong rise. In addition to favourable weather conditions, a return to normal sickness rates after the high levels seen in late 2023 is likely to have allowed the manufacturing sector to catch up on production. With monthly ups and downs, the trade in goods has also trended upwards lately. At the same time, new manufacturing orders – excluding the high monthly fluctuations caused by large orders – continued to decline in January and retail sales also fell again at the start of the year. Despite a gradual stabilisation of purchasing power and a continuing rise in overall employment, the trend seen in the retail trade remains weak.

Sentiment-based leading indicators are currently suggesting that the overall short-term economic tide is turning: according to the ifo Business Climate Index, companies’ expectations brightened up considerably in March, as did their assessment of the current business situation. Sentiment among private households in Germany, as reflected in the GfK Consumer Climate Survey and the HDE consumer barometer, also began to stabilise lately.

In their most current joint economic forecast, which is informed by a slight overall improvement in the indicators, the economic research institutes predict economic stagnation for Q1 of 2024, followed by a noticeable economic upturn later in the year, as inflation rates continue to fall, wages and incomes increase, the labour market remains stable and impetus from foreign trade increases. Nevertheless, the expected recovery is still subject to uncertainties, particularly uncertainties linked to geopolitical developments.

GLOBAL ECONOMIC OUTLOOK BRIGHTENING UP

In January, global industrial output shrunk by 0.5% from the preceding month, but expanded year- on-year (+1.2%). However, the purchasing manager indexes in some important sales markets for Germany, including in the EU, have recently improved, as has the sentiment indicator developed by S&P Global, which rose for the fifth consecutive time to reach 52.3 points in the reporting month of March (February: 52.1 points). The index for the manufacturing sector rose, too (from 50.3 to 50.6 points), as did the one for services (from 52.4 to 52.5 points).

This ties in with the fact that the previously elevated inventories (particularly of intermediate goods) have been reduced – a development that is likely to have benefitted global trade as well. In January, the global trade in goods had increased by 0.9% compared to the preceding months and the current leading indicators are pointing to a continued recovery. The RWI/ISL Container Throughput Index continued to trend upward in February and now stands at 129.5 points. The North Range Index for European ports, in particular, rose considerably (from 101.0 to 104.0 points); the rise of the RWI/ISL index would have been considerably higher had it not been for the noticeable decline in container handling in the Chinese ports. At present, the restrictions regarding shipping in the Red Sea do not appear to have a significant impact on global trade.

In summary, the latest data add to the expectation that global trade will recover this year. After a decline of 1.9% in global trade in goods in 2023, the German economic research institutes in their joint economic forecast expect this trade to increase by 1.3% this year and 2.2% in 2025, which would be a return to the longer-term trend.

FOREIGN TRADE TO RECOVER DESPITE A DAMPER ON EXPORTS

Following a strong start to the year, exports saw a correction in February. Nominal exports of goods and services fell slightly between January and February, after adjustment for seasonal factors and calendar irregularities (-0.8%). After a palpable increase in the trade of goods with the EU Member States in January (which was partially attributable to large orders), February brought a setback (- 3.9%). However, exports to non-EU countries increased month-on-month (+0.4%). Imports of goods and services saw another palpable increase in February (+2.8% over the preceding month). Again, trade with other EU Member States was down (-5.7%), but imports from third countries rose significantly between January and February (+14.7%). As imports rose and exports fell, the monthly trade surplus decreased from €22.9 billion in January to €17.6 billion in February.

Foreign trade prices continued to be affected by the development of prices for imported energy in February, especially natural gas. Overall, import prices fell 4.9% in February compared to February 2023; energy imports were 20.7% cheaper. Export prices also fell year-on-year (-1.1%) – again mainly because of much lower prices for energy exports.

The leading indicators suggest a recovery of foreign trade, with ifo export expectations brightening considerably in March (up from -6.6 points to -1.4). The number of industries expecting an increase in exports has risen significantly to now also include the automotive and chemical industries. Other industries, including energy-intensive metal producers and metalworkers, expect their foreign sales to fall. Most recently, the companies surveyed were also more positive about the development of foreign orders. However, these have so far trended at a low level and with high fluctuations. Following a strong start to the year, exports saw a correction in February. Overall, however, nominal exports of goods and services in Q1 have so far been palpably stronger than in the preceding quarter (+2.9%). Imports of goods and services are also up quarter-on-quarter (+2.0%). In combination with the brightened signals sent by the leading indicators, these developments support the expectation that we are going to see a moderate recovery of the export business. The possibility that geopolitical and trade policy tensions may exacerbate poses a risk for the development of foreign trade.

SECOND CONSECUTIVE INCREASE IN MANUFACTURING OUTPUT

The goods-producing sector was able to expand its output by a solid 2.1% (adjusted for price, seasonal and calendar variations) between January and February. This is the second successive substantial rise. Industrial output also continued to rise by a palpable margin (+1.9%). Prior to this, it had been falling since May 2023. The construction industry saw strong growth of +7.9%, following on from an expansion of 2.9% in January. In contrast, the latest figures show that energy output dropped significantly again, by 6.5%. Much of the positive development seen in the construction industry in the past two months is likely to be attributable to the mild weather, and the considerable expansion of output from the goods-producing sector is certainly owed in part to pent-up activity after a time of high sickness rates at the end of 2023.

The various branches of the industrial sector have fared differently: significant increases in production were recorded for chemical products (+4.6%), pharmaceutical products (+6.4%), and the important sector of cars/car parts (+5.7%). By contrast, output from the important mechanical engineering sector has shrunk (-1.0%), as has output from electric equipment (-2.7%) and printed products (-2.6%).

New manufacturing orders rose slightly (+0.2%) between January and February, adjusted for price, calendar-day and seasonal factors; in January there had been a set-back (-11.4%) following a sharp rise in December (+12.0%). The latest figures show a rise in orders from Germany (+1.5%), whilst fewer orders were received from abroad (-0.7%). This figure was affected by a sharp drop in orders from the eurozone (-13.1%). Orders from the non-eurozone grew by 7.8%. Once again, the monthly comparison was dominated by large orders; excluding these, there was a fall of 0.8%.

The individual branches within the manufacturing sector saw differing developments in their order books in February: mechanical engineering reported a clear increase in new orders (+10.7%), and this was also true of pharmaceutical products (+6.6%) and chemical products (+3.1%). By contrast, orders declined particularly in the fields of electrical equipment (-1.9%), metal production (-5.3%) and especially in the important field of cars and car parts (-8.1%).
The latest data add to the impression that the industrial sector is beginning to stabilise. Prior to this, the indicators of sentiment like the ifo business climate and the purchasing managers’ expectations indexes had already been pointing in this direction.

RETAIL TRADE GOT OFF TO DISAPPOINTING START TO THE YEAR

Real retail turnover (excluding motor vehicles) fell considerably by 1.7% in February compared to the preceding month, resulting in the fourth successive downward development month-on-month. Year- on-year, the retail sector reported a real sales decline of 2.6% in February. Trade with foodstuffs was also down month-on-month (-1.3%) and year-on-year (-1.6%). Online and mail-order trade shrank by 4.2% in February (-6.0% year-on-year).

New car registrations by private individuals fell by 9.9% between February and March. Quarter-on- quarter, which is a more meaningful comparison, the decrease is also hefty, at 13.0%. New car registrations fell by 2.0% overall in March; the respective quarter-on-quarter comparison shows a decline of 4.9%.

Sentiment among private households in Germany, as reflected in the GfK Consumer Climate Survey and the HDE consumer barometer, has recently shown signs of bottoming out. In April, the HDE consumer barometer rose for the third consecutive time and GfK also reports a slight improvement in the consumer climate in April. This is mainly reflected by falling private-sector savings rates and the expectation of rising incomes. All in all, the leading indicators are trending slightly upwards, albeit starting on a low level. However, the combination of rising wages and falling inflation rates means that consumer spending is likely to recover in spring.

INFLATION FALLING APPRECIABLY ONCE AGAIN

The inflation rate (the rise in price levels year-on-year) fell to 2.2% in March, i.e. the lowest level recorded since April 2021. The figures for January and February were 2.9% and 2.5% respectively. This means that inflation has been trending downwards since March 2023. The core rate (excluding energy and food) went down to 3.3% (Jan/Feb: 3.4% in both cases). Prices for food fell for the first time since February 2015 (-0.7% year-on-year). Energy prices also dropped again compared to the same month of the preceding year, this time by 2.7% (Feb: -2.4%). By contrast, inflation in the services sector saw another slight increase (+3.7% compared to +.3.4% in January and February respectively).

The upstream stages of the economy are also seeing less price pressure, with producer prices falling 0.4% between January and February and 4.1% year-on-year. That figure had stood at -4.4% in January. The decisive factor in this fall was the drop in energy prices. Import prices in February were 4.9% lower than in the same month a year ago (-0.2% month-on-month). Wholesale selling prices fell by 3.0% year-on-year in February. Compared to the preceding month, they declined slightly (-0.1%).

Prices for natural gas recently fell again on the spot markets. Currently, the TTF Base Load stands at around €28/MWh, just under 35% down on the previous year’s level. This does, however, correspond to an increase of approx. 6% over the preceding month. Market expectations suggest that natural gas prices will be roughly around €30/MWh in the coming quarters.

In the coming months, factors that tend to bring down inflation, such as price drops on the upstream markets, come into play along with factors that will temporarily increase the inflation rate, such as the return to regular VAT rates for gas and district heating in April and a base effect caused by the introduction in May 2023 of the €49 ticket for regional buses and trains that is valid across the whole of Germany. Oil price development in the face of the escalation of the Middle East conflict is also a risk for the development of energy prices overall; recently, spot prices for Brent oil rose approx. 10% month-on-month.

WEAK SPRING RECOVERY ON THE LABOUR MARKET

Given the current economic situation, this year’s seasonal spring revival on the labour market is less pronounced than usual: seasonally adjusted unemployment fell by 4,000 people in March, continuing the trend observed since summer 2022. The level of gainful activity continued to rise in February (+16,000 persons). In January, the number of jobs subject to social insurance contributions rose by 27,000 (in seasonally adjusted terms) The decline in jobs in the goods-producing sector and other industries whose performance is strongly correlated with short-term economic development is overcompensated by new jobs created in the services sector. Cyclical short-time work rose slightly to approx. 190,000 persons in January, and notifications with the BA suggest that it will continue to stay between 160,000 and 200,000 in the coming months. The leading indicators are currently giving off mixed signals: while the number of vacancies registered with the Federal Employment Agency is continuing to fall, the IAB labour market barometer and companies’ willingness to hire new staff as reported by ifo brightened a little in March. It is likely that the situation on the labour market will continue to stagnate. Only once the economic recovery sets in later in the year is the labour market likely to also see a revival.

NUMBER OF INSOLVENCIES UP COMPARED TO THE PRECEDING MONTH

The Halle Institute for Economic Research’s Bankruptcy Update puts the number of insolvencies at 1,297 in March, which is up 9% from the preceding month. According to the Institute, this is the highest figure since it began collecting data in 2016. It is around 35% higher than the same month of the previous year and around 30% above the March average for the years 2016 to 2019. According to data from the Halle Institute, the number of employees affected (largest 10% of companies) remained roughly the same as in February, but is still almost 42% higher than the March average prior to the COVID-19 pandemic. However, the leading indicators suggest that the number of insolvencies might recede as of May, even though they are likely to remain above the average for the years prior to the pandemic.

---------------------------

¹ This report is based on data that was available as of 12 April 2024. 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.