The economic situation in Germany in February 2024

Based on a weak year-end quarter, current leading indicators for the German economy do not yet point to a noticeable economic recovery. According to the flash report from the Federal Statistical Office, GDP fell by 0.3% in the fourth quarter, adjusted for price, calendar and seasonal effects. In view of the falling inflation rate, rising incomes and robust employment growth, consumer spending by private households is likely to have provided a positive, albeit small, stimulus. According to the Federal Statistical Office, however, investments in buildings and equipment in particular fell significantly at the end of the year. In addition to increased material and financing costs in construction, higher energy prices and continued weak domestic and foreign demand are likely to have had a negative impact on industry. An exceptionally high level of sick leave among the workforce is also likely to have dampened the volume of work at the end of the year and weighed on GDP development in the fourth quarter.

According to the ifo Business Climate Index, sentiment in companies deteriorated again in January, with both the assessment of the current business situation and the outlook for the coming months being downgraded. The mood among private households in Germany, as reflected in the GfK consumer climate, has also deteriorated again recently. Both economic and income expectations as well as the propensity to buy declined again in January - following an increase in the previous month.

In addition to persistently high sickness rates, the strikes in local and long-distance public transport at the start of the year and ongoing geopolitical tensions, in particular delays in delivery times and increases in transport costs as a result of the Houthi attacks in the Red Sea, could also have a dampening effect on economic development. Taken together, these factors could lead to a further delay in the expected economic recovery.

Mixed signals from the global economy

In November, global industrial production increased by 0.3 %, having previously stagnated. The previous key interest rate hikes by many central banks are still having an impact and the uncertainty caused by the ongoing geopolitical tensions is weighing on economic development, which is reflected in the current purchasing managers' indices in many places. For Germany's key trading partners, particularly in the eurozone, these remained below the growth threshold of 50 points at the start of the year. By contrast, sentiment in the USA and emerging markets improved somewhat in January. The S&P Global sentiment indicator also recovered for the third time in a row in January (to 51.8 points): Sentiment improved in both the manufacturing sector (from 49.0 to 50.0 points) and among service providers (from 51.6 to 52.3 points). Overall, global demand and inventories, which had increased significantly in the wake of the supply chain disruptions and dampened the industrial economy, appear to be normalizing.

Following slight increases in the previous three months, global trade fell by 1.4% in November compared to the previous month. The RWI/ISL Container Throughput Index currently indicates a further, but only slight, decline for the reporting month of December (from 125.4 to 125.1 points), partly as a result of the disruptions in the Red Sea. The North Range Index for European ports has actually increased, while container throughput in Chinese ports has fallen slightly. According to ship movement data from the Kiel Trade Indicator (KTI) for January, shipments through the Red Sea continued to decline in January, but the volume of goods shipped worldwide remained stable in January. Overall, global trade is likely to have remained weak at the start of the year, according to the CTI.

International organizations continue to expect global gross domestic product to expand at a modest pace this year. However, as demand and inventories normalize, global trade is likely to return to its historical trend and grow at a similar rate to production.

Significant setback in foreign trade

In December, nominal exports of goods and services fell significantly again compared to the previous month on a seasonally adjusted basis (-5.3%, November: +2.3%). In a quarterly comparison (Q4 vs. Q3), they were up by 0.3 % (full year 2023: -1.3 % yoy). The decline in goods exports in December was across the board: both the EU and other countries saw significantly lower deliveries than in November (China: -7.9%). At the same time, nominal imports of goods and services fell even more sharply than exports (-5.9%, November: +1.9%). They fell by 0.9% quarter-on-quarter and by as much as 6.1% year-on-year.

In December, foreign trade prices continued to be influenced by falling prices for imports of raw materials and energy. After four months of upward trends, import prices fell by 1.1% in December compared to the previous month on a seasonally adjusted basis, while export prices fell slightly (-0.1%). As a result, the terms of trade improved significantly in December for the first time since summer 2023, rising by +1.0% compared to the previous month. In real terms, the decline is therefore likely to have been weaker, especially for imports.

Following the noticeable deterioration in the terms of trade in 2021 and 2022, their improvement in the past year (2023 vs. 2022: +8.7 %) is also reflected in the trade balance. The cumulative balance of trade in goods and services for 2023 is around twice as high as in the previous year (€88.4 bn) at €+177.2 bn (sb). The monthly trade surplus almost stagnated in December (EUR 17.5 bn, November: EUR 17.6 bn).

The leading indicators for foreign trade are currently sending mixed but largely subdued signals, partly because goods are taking longer to transport as a result of the attacks in the Red Sea and changes to shipping routes. Ifo export expectations deteriorated further at the start of the year (from -7.1 points to -8.4 points) as a result of falling orders in key sectors such as the automotive industry, mechanical engineering and electrical engineering. The ship movement data of the Kiel Trade Indicator currently signal a further decline in real German exports for the reporting month of January (-2.3% year-on-year),

The setback in German foreign trade points to continued weak demand from abroad. In view of the ongoing geopolitical crises and the economic slowdown in key trading partner countries such as China and the USA, the outlook for German exports remains gloomy at the start of the year. According to current forecasts by international organizations, however, global trade is likely to expand at a similar rate to global GDP again in 2024, meaning that German exports should gradually recover over the course of the year.

Noticeable weakness in production at the end of the year

Production in the manufacturing sector fell by 1.6% in December compared to the previous month. This meant that there was another noticeable setback in production at the end of the year. Both industry and construction reduced their output (-1.5% and -3.4% respectively). The energy sector, on the other hand, once again reported a significant increase (+4.1%). Overall, production in the fourth quarter of 2023 was 1.8% below the level of the third quarter.

The economic sectors within industry developed very differently in December: the motor vehicle and motor vehicle parts sector recorded strong growth of +4.0 %. The manufacture of metal products (+0.8%) and pharmaceutical products (+4.7%) also expanded. By contrast, mechanical engineering (-1.6%) and the manufacture of electrical equipment (-3.5%) declined. The manufacture of chemical products was also down sharply at the end of the year (-7.6%). The energy-intensive industrial sectors as a whole, which in addition to chemicals include glass, glassware and ceramics as well as metal production and processing, produced 5.8% less than in the previous month.

New orders rose significantly in December compared to the previous month (+8.9%), after remaining unchanged in November (0.0%) and falling noticeably in October (-3.8%). However, incoming orders in December were again strongly influenced by fluctuations in large orders in a month-on-month comparison; excluding these, there was a drop of 2.2%. The overall increase in incoming orders in December is primarily due to a significant increase of 34.5% in demand from the eurozone, but domestic orders also rose by 9.4%. However, orders from outside the eurozone fell by 7.5%.

In December, order trends in the individual manufacturing sectors varied: other vehicle construction and electrical equipment in particular recorded strong growth of 110.9% and 38.7% respectively. The metal products (+18.0 %), pharmaceutical products (+8.2 %) and metal production (+4.9 %) sectors also recorded increases. By contrast, the important sectors of motor vehicles/vehicle parts (-14.7%), mechanical engineering (-5.3%) and chemical products (-3.7%) reported declines.

Incoming orders in the manufacturing sector did not continue their downward trend of the previous months, which had already been strongly influenced by volatile large orders, with the noticeable increase in December. In a more meaningful quarterly comparison, however, orders in the fourth quarter remained more or less constant compared to the third quarter (+0.1%). Excluding large orders, they fell by 2.6%.

There are currently no signs of a turnaround in the industrial economy, even though incoming orders, including large orders, rose sharply in December and the ifo business climate for the manufacturing industry has recently stabilized. A gradual economic recovery is only likely to set in as the year progresses in the wake of a domestic economic upturn.

Negative end to the year in the retail sector

Real sales in the retail sector excluding motor vehicles fell by 1.6% in December compared to the previous month, having already declined by 0.8% in November. Compared to the same month last year, the retail sector reported a 1.8% drop in real sales in December (November: -1.6%). Compared to the previous month, food retail fell by 2.8% in real terms in December (-0.6% compared to the previous year).

As a result of the sharp rise in food prices, this segment of the retail trade has seen a year-on-year decline in sales in real terms for more than 2 ½ years, although this has recently eased. Food prices continue to rise at an above-average rate, even though their upward price trend has continued to weaken compared to the same month last year (January: +3.8 %; December: +4.6 %). Internet and mail order sales fell by 6.5% in December (-6.8% year-on-year).

New car registrations fell by 4.3% in January compared to the previous month, following an increase of 2.3% in December. The main reason for this volatile development is likely to be pull-forward effects in connection with the expiry of the scrapping bonus, which was terminated for commercial registrations at the end of August 2023 and for private individuals on December 18, 2023. As a result, new car registrations by private individuals fell noticeably by 21.5% in January. By contrast, new car registrations by companies and the self-employed increased by 6.3% in January.

The early indicators for the development of private consumption currently paint a rather pessimistic picture: according to the GfK forecast, the consumer climate will fall to -29.7 points in February. This is the lowest value since March 2023 (-30.6 points). At the same time, the propensity to save has recently increased again, with a value of 14.0 points reported for January (+6.7 points). The ifo Business Climate in the retail sector (incl. motor vehicles) fell by -3.8 points in January to its lowest value since November 2022 and remains in clearly negative territory (-26.6 points). Both the assessment of the current situation and expectations have deteriorated.

Overall, the leading indicators for private consumption are disappointing at the current margin. In view of the negative sentiment, a turnaround in the retail sector is not yet in sight - despite individual positive signals at the end of last year. However, with rising wages and falling inflation rates, a recovery in private consumption can be expected over the course of the year.

Inflation rate falls - despite the removal of energy price brakes and increased CO2 pricing

The inflation rate (price level increase within a year) amounted to 2.9% in January; this is the lowest figure since June 2021. In December, the rate was noticeably higher at 3.7%, which was largely due to a base effect from the so-called emergency aid in December 2022. This base effect no longer had an impact in January, meaning that the previous year's rate fell noticeably - despite the removal of price brakes for gas and electricity and the CO2 price increase for fossil fuels such as petrol/diesel, heating oil and natural gas.

The core rate (excluding energy and food) fell slightly again in January to 3.4% (Dec.: +3.5%) and was therefore - unlike in December - higher than the inflation rate again due to the elimination of the base effect for energy. Food prices again rose disproportionately in January compared to the same month last year (+3.8 %), although the upward price trend also continued to slow here (Dec.: +4.6 %). Energy prices fell again by 2.8% in January compared to the same month of the previous year (Dec.: +4.1%; Nov.: -4.5%; Oct: -3.2%) due to the absence of the base effect. In the services sector, inflation has recently risen again slightly to +3.4% (Dec: +3.2%).

A further slowdown in price momentum can also be observed at the upstream economic levels. Producer prices fell by 8.6% in December 2023 compared to the same month of the previous year. In November, the rate was -7.9%. The main reason for the year-on-year decline was the fall in energy prices. Compared to the previous month, producer prices fell by 1.2% in December. Import prices in December were 8.5% lower than in the same month last year (-1.1% compared to the previous month). Wholesale sales prices fell by 2.6% in December compared to the previous year. There was also a decrease compared to the previous month (-0.6 %).

Prices for natural gas on the spot markets have recently fallen again. At around € 27/MWh, the TTF base load is currently around 50 % below the level of a year ago. Compared to the previous month, there has been a decline of around 12 %. Market expectations suggest that natural gas prices will hover around € 30/MWh in the coming quarters.

Against this backdrop, inflation-dampening factors such as price declines at the upstream economic levels due to lower energy prices, the effect of the ECB's monetary tightening, appropriate wage agreements and a normalization of corporate profit margins are likely to remain in place over the remainder of the year.

Seasonally adjusted unemployment falls slightly at the start of the year

Unemployment rose in original figures as usual in January (+169,000 people compared to the previous month). In view of the mild weather, this was rather below average; seasonally adjusted (sb), there was a slight decline (-2,000). Employment also increased in December (sb +24,000 persons). Employment subject to social insurance contributions rose slightly in November (sb +6,000). Short-time work remained more or less constant in November, but the number of job advertisements fell again. Leading indicators for the labour market were mixed in January: the number of officially registered jobs stagnated and companies' willingness to hire decreased slightly, according to ifo. In contrast, the IAB labor market barometer improved for the second time in a row. According to this, the employment trend is likely to pick up again. The outlook for unemployment has also improved slightly, but remains negative. Overall, there is still no sign of a turnaround on the labor market. A sustained recovery can only be expected in the course of the anticipated economic upturn.

Company insolvencies recently almost unchanged

At 1,077 insolvencies of partnerships and corporations, the IWH insolvency trend leading indicator for January 2024 shows an almost unchanged figure compared to the previous month of December (1,078). Compared to the same month last year, the insolvency figures are 39% higher. The IWH assumes that the number of corporate insolvencies will continue to rise in the coming months. In addition to the difficult economic conditions, the catch-up effects of government aid during the coronavirus pandemic, which led to comparatively very low insolvency figures, are also seen as factors influencing this development.