The economic situation in Germany in May 2024

ECONOMIC RECOVERY AT THE BEGINNING OF THE YEAR

Economic development in Germany picked up slightly at the beginning of the year. According to the rapid release of the Federal Statistical Office on 30 April, gross domestic product rose by 0.2% in the first quarter of 2024 compared to the previous quarter in price-, calendar- and seasonally adjusted terms. Compared to the previous year, GDP was 0.9 % lower. More recent data was taken into account for 2023, which led to a slight change in the figures over the course of the year and resulted in an increase in annual GDP for 2023 from -0.3% to -0.2%.

On the expenditure side, data from the Federal Statistical Office showed that growth in the first quarter was mainly boosted by investments in the construction sector, with the favourable weather conditions at the start of the year likely to have played a key role. Net exports (exports minus imports) also supported growth. By contrast, investment in equipment and consumer spending are likely to have declined.

On the output side, value added in the construction and manufacturing sectors in particular is expected to have developed strongly in the first quarter. Consumer sentiment is still restrained, which is reflected in the subdued overall retail sales. Other service sectors, however, are likely to have stabilised growth.

The reported increase in GDP in the first quarter is generally in line with the Federal Government’s spring projection, which suggests an economic recovery at the beginning of the year. However, this is also partly due to special effects in construction and industry, such as mild weather and pent-up demand following the high sickness rate at the end of 2023. In particular, the weak trend in private consumption and investment in equipment as well as continuing weak industrial orders do not yet indicate a broad, sustainable upturn even though the more positive sentiment indicators in the corporate sector and consumer-related services suggest an upward trend. Given lower inflation rates, expected monetary policy easing, rising wages and incomes, a stable labour market and increasing impetus from foreign trade, the economic recovery will gradually consolidate and broaden out and it will pick up momentum over the remainder of the year. Still, the risks remain high in view of the geopolitical uncertainties.

GLOBAL ECONOMIC ACTIVITY CONTINUES UPWARD TREND

Adjusted for seasonal factors, global industrial output increased by 0.6% in February compared to the previous month. The sentiment indicator by S&P Global also points to further moderate expansion of the global economy at the current margin: in April, it rose to 52.4 points as a result of the brightened outlook among service providers. Even though sentiment in the manufacturing sector deteriorated slightly from 50.6 to 50.3 points in April, the indexes remain above the growth threshold of 50 points. This also fits in with the fact that the purchasing managers’ indexes in many European countries are now above the growth threshold again.

Global trade is also benefiting from the recovery in global industrial production. In February, global trade in goods rose by 1.0% compared to the previous month in seasonally adjusted terms. Compared to the previous year, this was also the first time since March 2023 that global trade returned to positive figures. The RWI/ISL Container Throughput Index points to a further upward trend in March. While container throughput in the Chinese ports more or less stagnated, the North Range Index rose by more than 10% (from 103.7 to 114.9 points). Although the higher level of activity in European ports is likely due in part to the economic recovery, the Leibniz Institute for Economic Research (RWI) suggests that delayed deliveries as a result of the disruption to shipping traffic in the Red Sea and the necessary diversions of cargo ships resulting from this probably also contributed to the increase in the figure for March.

According to the latest forecasts by international organisations, the momentum of global trade is likely to come close to that of global GDP again this year following the previous weak phase. Even though the sales prospects for the German export industry are slowly brightening, they remain subdued in the long-term historical comparison.

FOREIGN TRADE UP SIGNIFICANTLY IN THE FIRST QUARTER

Following a 0.3% drop in February, nominal exports of goods and services grew slightly by 0.8% month-on-month in March (adjusted for price, seasonal, and calendar-related factors). Demand for goods from countries outside the eurozone in particular contributed to this increase. Imports of goods and services, however, fell slightly by 0.3% compared to the previous month. While trade in goods with EU countries increased again, imports from non-EU countries dropped; imports from Russia continued their downward trend. Overall, the monthly trade surplus increased from €16.7 billion in February to €18.6 billion in March (adjusted for seasonal effects) as a result of a slight increase in exports and a slight drop in imports.
In a quarter-on-quarter comparison, nominal exports of goods and services were +3.5% higher in the first quarter than in the previous quarter, following a decline in the final quarter of 2023. Imports of goods and services also increased by +1.5% quarter-on-quarter.

In the month-on-month comparison, price increases for intermediate and consumer goods had a noticeable impact on foreign trade prices. In March, import prices rose by 0.3% in seasonally adjusted terms compared to the previous month. At the same time, export prices fell slightly by 0.1%, partly due to lower prices for energy exports. This means that month-on-month, the terms of trade, i.e. the ratio of export to import prices, deteriorated slightly for the first time since October 2023.

The leading indicators still paint a mixed picture. Incoming orders from abroad rose by 2.0% in March compared to the previous month in seasonally adjusted terms after falling in January and February. A much higher number of new orders came from the eurozone in particular (+10.6%), while the other trading partners placed fewer orders than in the previous month (-2.9%). Large orders from abroad did not play any significant role in March. The ifo export expectations were slightly more negative again in April, standing at -2.0 after -1.2 points in the previous month. While manufacturers of data processing equipment and some energy-intensive sectors (e.g. manufacture of glass and ceramics, chemicals, paper) expect exports to increase, foreign demand is expected to decline in just as many sectors (e.g. metal production processing, textiles, electrical equipment). Overall, the companies surveyed by the ifo Institute again considered their foreign order backlogs to be worse than in the previous month.

The latest development points to a turnaround in German foreign trade. According to a rapid release from the Federal Statistical Office, foreign trade had a positive impact on GDP development in the first quarter. In combination with the positive signals sent by some leading indicators, these developments support the expectation of a moderate recovery of the export business. However, the slight decline in the PMI for the eurozone in April illustrates that the signs of recovery in the industrial sector involve a high degree of uncertainty.

GROWTH IN OUTPUT IN THE FIRST QUARTER DESPITE SETBACK IN MARCH

Adjusted for price, calendar and seasonal factors, production in the manufacturing sector fell slightly by 0.4% in March compared to the previous month, following growth of 1.3% and 1.7% in January and February respectively. Industrial output also fell recently by 0.4%, following increases of +1.3% in January and +2.0% in February. However, output in the construction sector increased by 1.0%, following significant increases of 2.9% and 4.2% in January and February respectively. Energy production decreased again by 4.2 %.

The individual branches within the industrial sector saw differing developments in March: while output rose in the motor vehicle/vehicle parts (+0.6%), electrical equipment (+0.6%) and metal products (+0.3%) sectors, it fell in mechanical engineering (-1.0%) and pharmaceutical products (- 0.3%).

Output in the particularly energy-intensive industrial sectors remained unchanged overall, following significant increases of 4.3% and 4.6% in January and February respectively. However, development in the various industries varied considerably. Growth in chemical products (+2.0%) was offset by declines in coking and oil processing (-4.5%), glass, glassware and ceramics (-1.5%), metal production and processing (-1.3%) and paper and cardboard (-0.4%).

In the more meaningful quarterly comparison, industry and manufacturing as a whole recorded noticeable growth of 0.7% and 1.0% respectively, despite the recent setbacks. In the construction industry, there was even an increase of 3.9 % in the first quarter compared to the previous quarter. The mild weather conditions were certainly a key factor influencing this positive trend.

Incoming orders fell slightly by 0.4% in March compared to the previous month, adjusted for price, calendar and seasonal factors. There had already been a decline in February (revised: -0.8%). While there were fewer domestic orders (-3.6%), orders from abroad increased (+2.0%), which was due to a significant rise in demand from the eurozone (+10.6%). By contrast, there was a -2.9% drop in orders from the non-eurozone.

The individual branches within the manufacturing sector saw differing developments: the sharpest declines were recorded by the metal products (-4.5 %), metal production (-3.5 %) and other vehicles (-2.3 %) sectors. However, the clothing (+7.0%) and electrical equipment (+5.9%) industries recorded significant growth rates. The important automotive industry also reported an increase in orders (+1.1%).

In recent months, the overall trend in new orders was repeatedly dominated by large orders and has been subject to strong fluctuations with the trend still pointing downwards. The continued brightening of the ifo business climate and the purchasing managers’ index suggests a recovery in industrial production as the year progresses.

SENTIMENT IS BRIGHTENING IN THE RETAIL SECTOR

Real retail turnover excluding motor vehicles fell by a significant 1.8% in January compared to the preceding month, after falling for four months in a row. Year-on-year, the retail sector reported a real sales increase of 0.3% in March, after declining by 2.3% in February. Trade with foodstuffs also recorded a rise in sales month-on-month (+3.6%) and year-on-year (+3.9%). Online and mail-order trade increased by +3.3% in March (compared with -1.9% in the same month of the previous year). A month-on-month decline in sales was recorded for ICT and data processing equipment as well as furniture and furnishings.

Overall, new car registrations rose by 1.3% in April compared to the previous month (+19.8% year- on-year). In the more meaningful two-month comparison, however, registrations fell by 3.9%. New car registrations by private individuals rose by 3.1% between March and April. Looking at a two- month period, there was a decline of 7.5 % after high fluctuations in the previous months. New car registrations by companies and self-employed persons rose by 0.4% in April (March: +2.4%).

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 May, the HDE consumer barometer rose for the fourth time in a row to its highest level since the end of 2021. According to GfK, the consumer climate also increased slightly again in April and the forecast for May suggests an upward trend, with income expectations in particular having a positive effect. Overall, the leading indicators are trending increasingly upwards, albeit from a low level. Given rising wages and falling inflation rates, consumer spending is expected to gradually recover.

INFLATION REMAINS AT A LOW LEVEL

The inflation rate, i.e. the rise in the consumer price level within the space of a year, remained unchanged at +2.2% in April. The figures for January and February were 2.9% and 2.5% respectively. Inflation has thus been on a downward trend since March 2023. The core rate (excluding energy and food) fell to 3.0%, down from 3.3% in March. Prices for food rose by 0.5% in April compared to the same month last year, after falling in March for the first time since February 2015. By contrast, energy prices fell further compared to the same month last year, most recently by 1.2%. In the services sector, prices continued to rise at an above-average rate of +3.4 %.

The upstream stages of the economy are seeing a slowdown in price declines. Producer prices fell by 2.9% in March 2024 year-on-year. That figure had stood at -4.1% in February. The decisive factor here was the drop in energy prices. Producer prices rose slightly in March compared with the previous month, up 0.2%. Import prices in March were 3.6% lower than in the same month of the preceding year (+0.4% month-on-month). Wholesale sales prices fell by 3.0% year-on-year in March. Compared to the previous month, they rose by 0.2%.

Natural gas prices on the spot markets recently fell again. Currently, the TTF Base Load stands at around €30/MWh, around 16% below the previous year’s level. Compared to the previous month, however, there was an increase of almost 10 %. Market expectations suggest that natural gas prices will be roughly around €30/MWh in the coming quarters.

It is likely that there will be slightly higher inflation rates again in the coming months, at least temporarily. The VAT reduction on gas and district heating expired on 1 April and from 1 May, the price-reducing effects of the €49 ticket for regional buses and trains (that is valid across the whole of Germany) introduced a year earlier (base effect), will no longer apply. Prices for services are also more persistent as a result of significant wage increases which have a greater impact here due to the higher proportion of labour costs.

All in all, however, inflation-reducing factors such as continued price declines at the upstream stages of the economy due to lower energy prices, the effects of monetary tightening by the ECB, appropriate wage settlements and normalisation of corporate profit margins are likely to persist during the rest of the year.

WEAK ECONOMIC ACTIVITY AFFECTS THE LABOUR MARKET

As in the previous month, the usual spring recovery on the labour market again failed to gain momentum in April as a result of the current weak economic activity. The upward trend in unemployment continued with an increase of 10,000 persons (seasonally adjusted). At the same time, employment continued to rise in March (+8,000 jobs), albeit at a slower pace. As has been the case since last year, the increase in employment is solely attributable to foreign workers. In February, the number of jobs subject to social insurance contributions rose by 9,000 (in seasonally adjusted terms). Cyclical short-time work rose to 204,000 persons in February, and notifications with the BA suggest that it will increase over the rest of the year.
Despite the economic weakness, the labour market continues to develop quite robustly. Job growth in the service sector continues to outstrip job losses in cyclically sensitive sectors such as industry and construction. Some leading indicators have recently deteriorated somewhat: the number of vacancies registered with the Federal Employment Agency (BA) continued to fall and, according to the ifo Institute, companies’ willingness to hire fell slightly in April. However, the IAB Labour Market Barometer indicates a more positive trend. In the wake of the expected economic recovery and the increasing employment of refugees from Ukraine, the situation on the labour market is likely to improve again later in the year.

RISE IN CORPORATE INSOLVENCIES CONTINUES

According to the final figures for February 2024, corporate insolvencies increased by 10.0% compared to the previous month (+31.1 % year-on-year) to 1,785. This is the highest monthly growth rate since March 2022. This figure was also 8.0% above the February average of the 2016-2019 pre- COVID level. This shows that the trend towards higher insolvency figures that began in mid-2022 is continuing. The pent-up demand resulting from the COVID-19 pandemic and the economic environment, which is currently very challenging for many companies, continue to contribute to this trend. While the number of employees affected (-17.7 %) fell compared to the previous month, the number of expected insolvency claims rose by +15.3 %.

For April 2024, the Leibniz Institute for Economic Research Halle (IWH) counted 1,367 insolvencies of partnerships and corporations, which is a record high for the third consecutive month since recording began in January 2016. However, the IWH expects insolvency figures to fall from May or June at the latest, with leading indicators pointing to an easing of the number of insolvencies which, according to the IWH, is currently still exceptionally high.

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