The economic situation in Germany in June 2024

The latest indicators still paint a subdued picture of the German economy at the start of summer: the palpable brightening of the sentiment indicators for the industrial sector, construction and services and the improvements in the overall framework are only beginning to become apparent in the real data. Short-term dampening factors in the industrial sector due to weak foreign demand and disruptions of production resulting from the floods in Bavaria and Baden-Württemberg are countered by factors stimulating demand for consumer-related services in connection with the European Football Championship. Output in the goods-producing sector is not yet reflective of a sustained recovery. In April, it fell by 0.1% compared to the preceding month, resulting in near stagnation. While construction output fell by a significant -2.1% again in April, industrial output expanded slightly by +0.2%. Following the previous declines, energy generation increased noticeably by 1.6%. Production in the particularly energy-intensive industries was down 0.9% in April. However, the two-month comparison shows an expansion of output from the industrial sector (+0.6 %), capital goods (+1.2 %) and particularly the energy-intensive industries (+1.5 %). Retail trade slowed down slightly in April. Real retail turnover (excluding motor vehicles) fell slightly by 0.2% month-on-month. Compared with April 2023, the retail sector experienced a small increase in turnover of +0.3% (March: +1.1%). Overall, the leading indicators are increasingly suggesting the arrival of a recovery, albeit from a low level. The inflation rate rose slightly to 2.4% in May. Much of this increase is attributable to a base effect resulting from last May’s introduction of a flat-rate public transport ticket that is valid across Germany at a cost of €49 per month. The core rate (excluding energy and food) remained unchanged at 3.0%. Food prices were up 0.6% in April compared to a year ago. Energy prices continued to fall compared to a year ago, but at a slower rate (- 1.1%). Overall, the fundamentals suggest that price development will be moderate in the course of the year. The labour market continued to be shaped by weak short-term cyclical dynamism in May: unemployment, in seasonally adjusted terms, rose by 25,000 persons, whereas the number of gainfully employed persons rose by 25,000 in April. Once again, this job growth was largely attributable to the services sector, which more than compensates for the job losses seen in industrial branches that are particularly sensitive to short-term economic developments. The latest leading indicators send mixed signals, which, taken together, suggest that the current trend is likely to continue. According to the insolvency indicator of the German Economic Institute (IW) in Halle, insolvencies of partnerships and corporations fell by 7% in May compared to the preceding month.

ECONOMIC RECOVERY ON A BUMPY ROAD

Following the economic revival at the beginning of the year, which is likely to be partly attributable to favourable weather conditions and special effects caused by pent-up demand, the initial leading indicators for the second quarter send a mixed message about the likely short-term economic development. The palpable brightening of the sentiment indicators for the industrial sector, construction and services since the beginning of the year and the improved framework are only beginning to become apparent in the “real” economic data.

New manufacturing orders (including large-scale orders) are continuing to trend downwards – albeit at a slowing pace – and the increases in output registered at the beginning of the year did not persist into March or April. However, in contrast to output in the construction sector, for which the tone was set by favourable weather conditions at the beginning of the year, but whose output fell by a considerable 2.1% in April, the industrial sector continued on its upward trajectory (+0.2%).

The dramatic situation in the flooded regions of Bavaria and Baden-Württemberg seems to have resulted in a temporary disruption of production and in short-time work at some of the companies located there. However, similar events in the past have shown that these regional restrictions are not likely to have a lasting impact on the overall economic situation. As a general rule, it is possible to compensate for temporary disruptions of production fairly quickly, particularly when ordering activity tends to be on a decline and the company is not operating at full capacity. The Truck Toll Mileage Index, a leading indicator for manufacturing, fell slightly in May, suggesting that the manufacturing sector is not likely to generate palpable impetus to growth in the short term.

The expected economic recovery will therefore probably originate mainly in consumer-related services: sentiment in the field of private consumption as measured by the Ifo Business Climate Index for Trade, the GfK Consumer Climate Survey forecast and the HDE consumer barometer has continued to brighten. Real wages grew by 3.8% in the first quarter of 2024 compared to the same quarter in the preceding year, marking the fourth consecutive rise and the strongest year-on-year increase in real wages since measurements began in 2008. Wage growth was disproportionately high for low earners due to collectively bargained wage increases, but also on account of one-off payments of inflation compensation bonuses exempted from tax and welfare charges – bonuses that make up a relatively high proportion of the wage increases of lower earners.

Nevertheless, retail turnover remained very subdued given this positive background. In the coming months, however, the European Football Championship is expected to generate a temporary revival in consumer-related industries such as retail, catering and hospitality – though to a lesser extent than was the case during the 2006 Football World Cup. A lasting revival of the overall economy, however, will depend not only on a broad-based recovery of domestic demand, but also on an additional, palpable impetus from foreign demand.

GLOBAL ECONOMIC OUTLOOK CONTINUES TO BRIGHTEN UP

In March, global industrial output (adjusted for season) fell again slightly (-0.3%) compared to the preceding month, though remaining 1.2% higher in the year-on-year comparison. The leading indicators suggest that a recovery of the global industrial sector is about to begin. The sentiment indicator of S&P Global, for instance, increased quite markedly by 1.3 in March, to 53.7 points. Sentiment in the manufacturing sector has brightened a little (from 50.3 to 50.9 points) and is sitting firmly above the growth threshold of 50 points. With an increase from 52.7 to 54.1 points, the services sector made a significant contribution to the rise of the overall index. For the eurozone, too, the latest sentiment indicators, such as the sentix indicator for investors and surveys of purchasing managers, are suggesting a more broad-based economic recovery as the year continues. This is because, once the overstocks of interim and capital goods have been used up, the industrial sector is set to increasingly provide some tailwind.

Together with the loosening of monetary policy resulting in more favourable financing conditions for companies and households, this development is expected to boost international demand for German products and global trade in general.

It is true that global trade in goods saw a slight decrease in March (-0.6% in seasonally-adjusted terms, compared to the preceding month). However, the RWI/ISL Container Throughput Index edged up in April (from 128.1 to 128.8 points), continuing its upward trajectory. The Chinese ports saw an increase in container throughput, whereas the Nordrange Index had a setback after the strong rise in the preceding month. Nevertheless, the index is continuing to point to a recovery within the EU. Overall, container throughput is close to returning to its long-term trend, indicating that global trade has overcome the challenges of recent times. The expected recovery of global trade should also increasingly generate momentum for Germany’s export business. As demand from regions comprising important trade partners, such as the EU, is brightening up only reticently according to the forecasts published by international organisations, demand on Germany’s sales markets is currently expected to remain slightly less dynamic than the development of global trade.

GOODS TRADE IN APRIL STILL POINTING UPWARDS

Nominal exports of goods and services continued their slight recovery between March and April, after adjustment for seasonal factors and calendar irregularities (+0.5%). The goods trade with non-EU countries expanded by a particularly strong margin, especially trade with the United Kingdom. Imports of goods and services grew markedly by +2.5% from March 2024, particularly as a result of a strong rise in services imports (+4.1%) and goods deliveries from the EU (+4.3%). At the beginning of Q2, both exports and imports continued the recovery that began at the turn of the year. At €15.8 billion, the monthly trade surplus was much smaller than in the preceding month (€18.7 billion), due to a higher rise in imports compared to exports.

For foreign trade prices, the month-month comparison shows a rise in prices for products of the manufacturing sector in particular. Import prices were up 0.7% (seasonally adjusted) month-on- month, not least due to higher prices being charged for petroleum and gas imports. Export prices also increased, up 0.4%. This results in another month-on-month deterioration of the terms of trade. Therefore, real increases in exports and imports are likely to have been slightly lower than the reported figures.

The leading indicators suggest that foreign trade is continuing its moderate recovery. Foreign orders stagnated between March and April (+0.1% in seasonally-adjusted terms), having expanded by 0.8% in March. There were noticeably fewer orders from the eurozone (-1.4%). Excluding foreign large- scale orders, new orders registered a strong increase of 4.5%. The ifo export expectations reached 0.3 points – the first positive figure since April 2023. However, important export sectors such as mechanical engineering and the automotive industry are still displaying little dynamism. Overall, the companies surveyed by the ifo in May rated the state of their order books better than in the preceding month.

Overall, the recovery of Germany’s foreign trade seems to be gaining traction. Positive signals emanating from the export business of important sectors such as chemicals and from upward- pointing purchasing manager indexes for the eurozone confirm the expectation that German exports are set to continue to grow. All in all, however, the momentum continues to be slow as high geopolitical and trade-policy risks persist.

INDUSTRIAL OUTPUT ON A SLIGHT RISE IN APRIL

According to figures from the Federal Statistical Office, output in the goods-producing sector nearly stagnated in April, falling by 0.1% compared with the preceding month. It had already fallen slightly in March (-0.4%) following significant growth in previous months. While construction output decreased by a significant -2.1% again in April, industrial output expanded slightly by +0.2%. Following the previous declines, energy generation expanded noticeably by 1.6%.

Some branches within the industrial sector saw weaker growth in April: while output in the motor vehicle/vehicle parts sector expanded strongly by +4.2 %, output declined in pharmaceutical products (-1.6 %), electrical equipment (-0.8 %), metal products (-1.0 %) and mechanical engineering (-0.5 %). Output in the particularly energy-intensive industries was also down in April (-0.9%). The growth recorded in coking and oil processing (+4.2%) or paper and cardboard (+1.1%) was not sufficient to counterbalance the slowdown in output in large sectors such as chemical products (- 1.8%) or glass, glassware and ceramics (-1.9%).

However, the less volatile two-month comparison shows growing output from the industrial goods (+0.6 %), capital goods (+1.2 %) and the energy-intensive sectors (+1.5 %). In the construction industry, however, the favourable weather conditions at the beginning of the year dampened the usual seasonal recovery, resulting in a decline of 0.5%.

New orders fell slightly in April compared to the previous month (-0.2%). This shows that the downward trend seen since the beginning of the year is continuing, albeit at a much slower pace. In March, the decline was even as much as -0.8% (revised). Domestic orders slipped (-0.3%), whereas foreign demand stagnated (-0.1%). A drop in orders from the eurozone (-1.4%) was offset by an increase in orders from outside the eurozone (+0.6%).

Once again, the individual branches within the manufacturing sector saw differing developments. The sector of “other vehicles”, which in the past was dominated by large orders, saw a sharp decline in orders (-15.4%). Data, electrical and optical devices (-5.1%) and electrical equipment (-4.1%) also recorded significantly fewer orders. In contrast, there was a noticeable increase in orders in the textiles (+10.9%), motor vehicles and parts (+4.1%) and metal production (+3.3%) sectors.

Despite another decline in new manufacturing orders, the figure for April (adjusted for large orders) showed a strong increase of 2.9%. Large orders from other European countries in particular have recently led to high monthly fluctuations. Sentiment indicators such as the ifo business climate and purchasing managers indexes suggest a gradual recovery in domestic and foreign demand, which is expected to lead to a trend reversal in incoming orders over the further course of the year.

SLIGHT FALL IN TURNOVER DESPITE BRIGHTENING SENTIMENT

Real retail turnover (excluding motor vehicles) fell slightly by 0.2% in April (month-on-month). Compared with April 2023, the retail sector experienced a minor real decline in turnover of 0.3%. Turnover from the trade in foodstuffs was down month-on-month and also year-on-year (-3.1% and - 0.8% respectively). Online and mail-order trade expanded by 3.6% in April (+0.6% year-on-year). Month-on-month increases in turnover can also be found in the trade in ICT and data-processing equipment. New car registrations fell by 2.0% overall in May (year-on-year: -4.3%). The more robust two-month comparison shows a decrease of new car registrations by 1.0%. New car registrations by private individuals fell by 1.6% between April and May. The two-month comparison shows a decline of 3.0%; this comes after high levels of volatility in the preceding months. New car registrations by companies and self-employed individuals fell by 2.1% in May.

Sentiment among private households in Germany, as reflected in the GfK Consumer Climate Survey and the HDE consumer barometer, has recently started to brighten in a palpable way. The HDE consumer barometer climbed up for the fifth consecutive time in June, reaching its highest level since August 2021. The GfK consumer climate index also saw another slight improvement in May, with a positive forecast for June. The main drivers here were income expectations and a falling savings rate. Overall, the leading indicators are increasingly suggesting the arrival of a recovery, albeit from a low level. The European Football Championship is expected to generate positive momentum temporarily. The combination of rising wages and falling inflation rates means that the revival is likely to gradually stand on a firmer footing in Q2.

SLIGHT RISE IN INFLATION DUE TO THE BASE EFFECT

The rate of inflation (year-on-year rise in the price level) edged up to +2.4% in May. As expected, it was a little higher than in March and April, when it stood at +2.2%. Much of this increase is attributable to a base effect resulting from last May’s introduction of a public transport ticket that is valid across Germany at the cost of €49 per month. The core rate (excluding energy and food) for May remained unchanged at 3.0%.
Food prices were up by 0.6% month-on month, following a figure of +0.5% in April. Year-on-year, energy prices continued to fall in May, but at a slowing rate (-1.1%). In the services sector, inflation remained above average at +3.9%.

Upstream, prices are continuing to fall year-on-year. Producer prices fell by 3.3% in April compared to the preceding month. That figure had stood at -2.9% in March. The decisive factor in this fall was the drop in energy prices. Producer prices rose slightly in April compared with the preceding month, up 0.2%. Import prices in April were 1.7% lower than in the same month a year ago (+0.7% month- on-month). Wholesale selling prices fell by 1.8% year-on-year in April. Compared to March, they rose by 0.4%.

Prices for natural gas recently increased again on the spot markets. Currently, the TTF Base Load stands at around €34/MWh, just under 36% down on the previous year’s level. The gas price increased by almost 20% compared to 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 driving inflation are expected to be roughly counterbalanced by factors bringing down prices: on the one hand, experts expect upstream prices to fall, energy prices to continue to decrease slightly, and companies’ profit margins to normalise. On the other hand, services prices are expected to continue to rise due to considerable wage rises, which will have a stronger effect due to the higher share of labour costs in this segment.

LABOUR MARKET CONTINUES TO BE SHAPED BY WEAK SHORT-TERM ECONOMIC DEVELOPMENT

The trend seen on the labour market in the last few months continued in May: registered unemployment increased by 25,000 in seasonally adjusted terms. Underemployment, a better indicator of the underlying dynamics, rose by 15,000 persons. Gainful activity increased once again in April (+25,000); again, this job growth is largely attributable to services such as health and social services and the public sector, which more than compensate for the job losses seen in temporary employment agencies, manufacturing and construction, all of which are sensitive to short-term economic developments. The number of persons in cyclical short-time work rose to 219,000 in March; notifications to the Federal Employment Agency suggest that this number will decline as the year unfolds, but the impact of the floods in Bavaria and Baden-Württemberg, where some companies affected have experienced disruptions of production and short-time work, is probably not yet reflected in the figures.

The latest leading indicators send mixed signals, which, taken together, suggest that the current trend is likely to continue. The number of vacancies reported to the Federal Employment Agency is continuing to fall and the IAB labour market barometer fell to slightly under the expansion threshold of 100 points in May. By contrast, companies’ willingness to hire increased slightly in May, according to the ifo Employment Barometer. In the coming months, the European Football Championship could have a short-term positive effect on the labour market in consumer-related services such as hospitality, hotels and transport.

COMPANY INSOLVENCIES: FIRST DECLINE FOLLOWING RECORD LEVELS

For May 2024, the Halle Institute for Economic Research reports 1,271 cases of insolvencies of partnerships and corporations. This is 7% down on the preceding month. For the coming months, the Halle Institute for Economic Research expects the figures to continue to drop. However, insolvencies are still on an elevated level, with the current figure 40% higher than that for May 2023 and 31% above the 2016-2019 average for May, i.e. the pre-pandemic period.

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