The economic situation in Germany in August 2024

According to the Federal Statistical Office's flash report of 30 July, following the slight economic recovery at the beginning of the year, gross domestic product fell slightly by 0.1% in the period from April to June compared to the previous quarter, after adjustment for price, calendar and seasonal effects. This means that the recovery of the German economy is weaker than generally expected at the beginning of the year.

On the production side, the result is likely to have been characterised above all by a decline in strongly export-oriented industrial production and in the construction industry, as a counter-reaction to the weather-related special development in the first quarter. These dampening effects could not be offset by the positive trend in the service sectors. The dichotomy of the overall economic development also points to deeper structural problems in the German economy. For example, industrial production has not recovered properly since the coronavirus crisis. In the second quarter of this year, it was roughly at its average level for 2020 and thus well below the highs of the second half of 2017.

On the expenditure side, according to the Federal Statistical Office, investment activity in equipment and buildings in particular declined. This weakness is likely to be due not least to declining order backlogs and persistently weak incoming orders from Germany and, above all, abroad. As a result, capacity utilisation in German industry has fallen to 77.5%, six percentage points below the long-term average, according to a survey by the Ifo Institute.

The fundamental conditions for an internal economic recovery in the second half of the year are still in place: as a result of lower inflation rates and wage increases, private households have more money available in real terms and are no longer as pessimistic about the future. This is reflected in the latest GfK consumer climate survey, which suggests that consumer sentiment is likely to continue to recover in August. Private consumption could therefore provide economic impetus in the second half of the year.

The European Central Bank's interest rate turnaround is also likely to have an increasingly noticeable impact as the year progresses: surveys from the ECB's latest bank lending survey for Germany indicate a turnaround in the demand for credit, which has recently increased noticeably in all segments (corporate, residential and consumer loans). In the case of corporate loans, the demand for credit is due in particular to increased investment intentions, which indicates a revival of capital investment in the second half of the year.

However, the renewed deterioration in sentiment among companies, as indicated by the ifo Business Climate Index, the ZEW Economic Indicator and the S&P Global Purchasing Managers' Index at the beginning of the third quarter, has increased the risks to the generally expected economic recovery. In addition, there are new risks from geopolitical developments, less favourable international economic data and increased volatility on the financial markets.

Global industrial production has risen recently, but the outlook is cautious

In April and May, global industrial production rose by 0.6% and 0.2% respectively compared with the previous month, after seasonal adjustment. This means that it recently exceeded its level of a year ago by 1.9%. The S&P Global sentiment indicator fell by 0.4 points to 52.5 points in July, after already falling by 0.8 points in June. However, it remains above the growth threshold of 50 points. The latest decline is due to the industrial sector (from 50.8 to 49.7 points), while sentiment in the services sector improved slightly (from 53.1 to 53.3 points). The leading indicators thus point to a rather subdued development of global industrial production in the coming months.

World trade also appears to be stabilising further, albeit with fluctuations. In May, it increased by a mere 0.1% compared to the previous month, after having already risen by 1.1% in April. This means that it was slightly up on the previous year's level by 0.2%. A moderate recovery in world trade is also emerging for the second half of the year: the RWI/ISL container handling index stagnated at a high level and remained unchanged in June at 130.4 points, seasonally adjusted. While container handling in Chinese ports has increased, the North Range Index has fallen again. Overall, the container handling index is still trending upwards despite stagnation compared to the previous month.

However, new risks are emerging from geopolitical developments, unfavourable international economic reports and increased volatility on the financial markets.

Exports again noticeably down

The latest data on exports of goods and services is once again disappointing, and the leading indicators for German foreign trade are also predominantly cautious.

In June, nominal exports of goods and services fell again significantly by 3.5% compared to the previous month, after falling by 1.0% in May. In June, exports of goods to the United States fell by 7.7%, while exports to the People's Republic of China increased by 3.4%. Imports of goods and services fell by -0.6% compared to May 2024, but in May they had fallen noticeably by 3.4%. Imports of goods from the United States and the People's Republic of China fell by 6.5% and 4.9% respectively in June. This means that exports fell for the second time in a row, while imports stabilised at a low level. In view of the decline in exports of goods and the increase in imports of goods, the monthly trade surplus was lower in June than in the previous month at EUR 20.4 billion.

In June, seasonally adjusted import prices rose by 0.5% compared with the previous month, slightly more than export prices, which increased by 0.2%. This meant that the terms of trade deteriorated by 0.3% compared with the previous month. In real terms, the decline in exports is likely to have been somewhat greater and imports to have fallen slightly.

The leading indicators are sending out rather cautious signals regarding the further development of foreign trade. Incoming orders from abroad increased by 0.4% in June compared to the previous month, after a significant decline of 3.0% in May. In the more meaningful three-month comparison, there was a decrease of 3.1%. The ifo export expectations fell to -1.7 points in July, after having been at -1.3 points in June. The indicator suggests that no substantial improvement is to be expected. In export sectors such as the automotive sector and metal production and processing, a decline in foreign business is expected.

German foreign trade is likely to develop rather modestly in the foreseeable future.

Rise in production at the end of the second quarter

According to the Federal Statistical Office, production in the manufacturing industry rose by 1.4% in June compared to the previous month, after adjustment for price, calendar and seasonal effects. According to revised data, output in May had fallen by 3.1%. While output in the construction industry rose only slightly in June (+0.3%), industrial production (+1.5%) and energy production (+2.9%) increased more strongly.

The picture within industry is varied: while the pharmaceutical products (-6.6%) and food and animal feed (-5.3%) sectors recorded significant production declines, manufacturers of motor vehicles/vehicle parts (+7.5%), electrical equipment (+5.2%) and data processing equipment, electronic and optical products (+3.7%) were able to increase their output noticeably. Output also increased in the important mechanical engineering sector (+1.2%), in the chemical products sector (+1.5%) and in the particularly energy-intensive industrial sectors (+1.4%).

In a more meaningful three-month comparison, however, production in the manufacturing industry fell by 1.3%. The decline in industry was -1.0%, in construction -2.6% and in energy -1.2%.

New orders showed the first increase since the beginning of the year, although the trend continued to be characterised by strong fluctuations in major orders. In June, new orders in the manufacturing industry rose by 3.9% compared to the previous month, after adjustment for price, calendar and seasonal effects. According to revised figures, they fell by 1.7% in May. Orders from abroad rose only slightly by +0.4%, with countries outside the eurozone showing a more noticeable increase of +0.9%. Within the eurozone, however, a decline in orders of 0.3% was recorded. Domestic demand, on the other hand, expanded strongly by +9.1%. Adjusted for major orders, incoming orders were again clearly in positive territory at +3.3% compared to the previous month.

The development of incoming orders varied from one manufacturing sector to the next: while orders picked up again in the important sectors of mechanical engineering (+2.3%), motor vehicles and vehicle parts (+9.3%), metal products (+9.8%) and other vehicle construction (+11.7%), incoming orders declined in the areas of data, electrical and optical equipment (-7.9%), metal production and processing (-4.9%), pharmaceutical products (-4.6%) and the production and processing of paper and cardboard (-5.3%) compared to the previous month.

Even though the production data has recently improved again, the continued low level of incoming orders from abroad indicates that the industrial economy will remain subdued. In view of the gloomy business expectations in the manufacturing sector, a broad economic recovery is not in sight for the time being.

Consumer sentiment continues to improve at a low level

The Federal Statistical Office is not expected to publish retail sales figures for the reporting month of May until the end of August. New car registrations fell by 13.9% in July, and were 2.1% lower than in the same month of the previous year. In the more meaningful two-month comparison, registrations increased by 1.9% compared to the previous month. New car registrations by private individuals in July showed a decrease of 11.2% compared to the previous month. In the two-month comparison, there was an increase of 4.4% after high fluctuations in the previous months. New car registrations by companies and self-employed persons fell by 15.2% in July. Here too, a – at least slight – increase was recorded in the two-month comparison.

The mood among private households in Germany, as measured by the GfK consumer climate index and the HDE consumer barometer, has recently shown different trends: the HDE consumer barometer stagnated in August, after having slightly clouded over in July. The GfK consumer climate index, on the other hand, showed a significant increase in income expectations and a moderate increase in the propensity to buy in July. A recovery in the consumer climate is forecast for August compared with the previous month, whereas July saw a slight decline. However, both the GfK consumer climate and the HDE consumer barometer showed an upward trend in the first half of the year. In the wake of rising wages and declining inflation rates, private consumption could pick up in the second half of the year.

Inflation rate has risen slightly again recently, but inflation-dampening effects should prevail as the year progresses

The inflation rate, i.e. the increase in consumer prices within a year, rose slightly to +2.3% in July, after +2.2% in June and +2.4% in May. The core rate, which excludes the development of energy and food prices, remained unchanged at +2.9% in July.

The price pressure from food has increased again somewhat recently. Compared to the same month of the previous year, prices here rose by 1.3%, compared to +1.1% in June. At the same time, the price-dampening effect of cheaper energy has decreased. In July, energy prices were down -1.7% compared to the same month of the previous year, less than the -2.1% in June. In the services sector, the price increase remained unchanged at +3.9% and thus continued to be above average.

The price-dampening effects on the upstream economic levels have continued to decrease: in June, commercial producer prices fell by 1.6% compared to the same month of the previous year. In May, the rate was -2.2%. The main reason for the recent decline in producer prices was again the price decreases for energy. In comparison to the previous month, producer prices rose slightly by 0.2% in June. Import prices rose by 0.4% in June compared to the previous month and by 0.7% compared to the same month of the previous year. Wholesale selling prices fell by 0.6% year-on-year in June, and by 0.3% compared to the previous month.

Prices for natural gas on the spot markets have recently risen again noticeably as a result of geopolitical tensions. Currently, the TTF Base Load is around 40 €/MWh, about 15% above the level of the previous year. Compared to the previous month, they rose by around 25%. Market expectations indicate that natural gas prices will hover around €40/MWh in the coming quarters. The price of crude oil (Brent) fell by almost 4% compared to the previous month, to €75/barrel, and was down around 5% year-on-year.

The factors that will dampen inflation are likely to predominate as the year progresses: price declines at the upstream economic levels due to lower energy exchange prices, monetary tightening by the ECB, reasonable wage settlements and normalisation of corporate profit margins. According to the ifo survey, companies in the consumer-related sector are planning less frequently with rising prices. In its spring projection of 24 April, the Federal Government estimates an inflation rate of 2.4% and 1.8% for 2024 and 2025 respectively. The economic research institutes (06/24) expect 2.2 to 2.4% and 1.7 to 2.0% respectively.

Labour market characterised by stagnating economy

The economic development is leaving an ever clearer mark on the labour market. In July, seasonally adjusted registered unemployment rose by 18,000 people, which is significantly higher than the usual seasonal increase. Short-time working due to the economic situation fell to 211,000 people in May, and the number of short-time working notifications to the Federal Employment Agency was around a third higher in July than in the previous year. At the same time, the development of employment is characterised by a decreasing momentum. Although the number of employed persons continued to increase in June, with +166,000 persons compared to the same month of the previous year, the increase in the previous month, seasonally adjusted, was significantly lower than before, at +7,000 persons. Seasonally adjusted, employment subject to social security contributions also increased only slightly in May, compared to the previous months, at +5,000 persons.

Current leading indicators also point to a subdued development: although the IAB labour market barometer gives a slightly positive labour market outlook in July, the unemployment component continues to be clearly negative. The number of jobs registered with the Federal Employment Agency is still declining and the willingness of companies to hire has again decreased in July, according to the ifo employment barometer. There are currently no signs of a recovery in the labour market.

Increase in corporate insolvencies continues

According to final results, the number of corporate insolvencies rose by 1.5% in May compared to April. Compared to the same month of May 2023, the increase was 30.9%. At 1,934 cases, the highest figure since June 2016 (1,951) was recorded. In the first five months of 2024, corporate insolvencies were 28.8% higher than in the same period of the previous year and 6.0% above the average for the same period from 2016 to 2019. A number of developments are seen as the reasons for the continued dynamic insolvency situation, including the still subdued economic development and catch-up effects from the period of historically low insolvency figures characterised by special regulations in previous years.

The IWH insolvency trend in July 2024 shows a stronger than expected increase of 20.3% compared to the previous month (+37.2% compared to the same month of the previous year) with 1,406 insolvencies of partnerships and corporations, after a decline was recorded in May and June. The last time there was a larger relative increase on a monthly basis was in March 2021, albeit from a significantly lower level. Based on early indicators, the IWH expects insolvency figures to fall slightly in August and then rise again in September - and to remain consistently above the pre-corona level.