The economic situation in Germany in July 2024

The economic recovery is likely to be further delayed. The recent deterioration in sentiment indicators and the renewed declines in incoming orders and production show a continued weakness in the heavily export-oriented German industry, even though the latest figures may be somewhat distorted downwards due to bridge days in May.

After the exceptionally high order backlog in industry had stabilised production for some time as a result of the corona crisis and the associated material shortages, this buffer now seems to be increasingly depleted. At the same time, the continued decline in incoming orders, especially from abroad, is increasingly proving to be a brake on a sustainable recovery of the industrial economy. However, the brightening of the external economic environment, despite ongoing trade and geopolitical uncertainties, should lead to a turnaround in industrial production over the course of the year.

With regard to the development of private consumption, the latest sentiment indicators, such as the GfK consumer climate index and the HDE consumer barometer, have also clouded over somewhat recently, thus weakening the previous upward trend. Nevertheless, domestic demand should increasingly revive in view of the overall robust employment trend, moderate consumer price increases and rising real incomes. Not least, a small positive impulse is expected in the second quarter of 2024 as a result of the European Football Championship, from which consumer-related economic sectors such as retail, gastronomy and the hotel industry are likely to benefit in particular.

With the recent agreement on a government draft for the 2025 federal budget, the financial plan until 2028 and the presentation of a comprehensive growth initiative, which is intended to provide growth impulses through stronger work incentives, investment promotion and tax relief, the federal government has laid the foundation for a reliable, investment- and growth-oriented financial and economic policy. This should strengthen confidence among companies and consumers alike and improve the prospects for an economic recovery in the second half of the year.

Global economy continues to recover

The global industrial economy is only gradually picking up again. In April, global industrial production rose by 0.4% compared to the previous month, seasonally adjusted, and was thus up 2.2% compared to the same month of the previous year. Leading indicators point to a further modest expansion of global industrial production: The S&P Global sentiment indicator fell by 0.8 points to 52.9 points in June, after rising by 0.4 points in May. However, it remains above the growth threshold of 50 points. The latest decline is largely due to the service sector (from 54.0 to 53.1 points), while sentiment in the manufacturing sector remained almost unchanged (from 51.0 to 50.9 points). For the eurozone, current sentiment indicators paint a mixed picture: While surveys of investors suggest that the economy is likely to continue to improve in small steps, purchasing managers' indices in June remained slightly above the growth threshold, thanks in particular to robust growth in the services sector. However, they signal a weaker momentum than before at the end of the second quarter. Overall, however, the lower energy prices and the interest rate cuts that have begun should support the recovery of the industrial economy, particularly in European countries, as it continues.

World trade also appears to be stabilising further, albeit with fluctuations. In April, it increased by 1.5% seasonally adjusted compared to the previous month, after falling by 1.1%. This means that it exceeded its previous year's level by 1.8% in April. The second quarter is likely to see a further revival in global trade in goods: the RWI/ISL container handling index rose from 129.1 to 129.9 points in May, after seasonal adjustment. While container handling in Chinese ports has fallen, the North Range Index for European ports has seen a significant increase again after a setback in the previous month. With the expected recovery in key consumer countries and the upturn in world trade, especially in industrial products, German foreign trade is likely to continue to recover in the second half of the year.

Foreign trade receives a setback

Foreign trade was unable to continue its upward trend. In May, nominal exports of goods and services fell noticeably by 2.0% compared with the previous month, after adjustment for seasonal and calendar effects. This was mainly due to trade in goods with countries outside the EU, which fell by 4.9% compared with the previous month; trade with EU countries fell by 2.5%. Imports of goods and services fell even more sharply, by 5.5% compared with April 2024, mainly as a result of the 8.9% drop in deliveries from the EU; imports from non-EU countries were down 4.0%. This put a damper on the recovery in foreign trade that has been observed since the turn of the year, both in terms of exports and imports. In the less volatile three-month comparison, however, exports and imports continued to grow, by 2.2% and 3.5% respectively. The monthly trade surplus was higher than in the previous month at EUR 21.2 billion, due to the stronger decline in imports compared to exports.

Seasonally adjusted import prices rose slightly by 0.1% in May compared with the previous month, while export prices rose by only slightly more (+0.2%). This means that the terms of trade remained almost unchanged compared with the previous month (+0.1%). In real terms, the declines in exports and imports are therefore likely to have been only slightly higher.

Leading indicators are sending out mixed signals regarding the further development of foreign business. Incoming orders from abroad fell significantly in May compared to the previous month, down 2.8% in seasonally adjusted terms, after already declining by 1.0% in April. In particular, fewer orders were received from the non-euro area, down 4.6%. The ifo export expectations fell to -1.0 points in June. In May, they had been in positive territory again for the first time since April 2023. The indicator currently does not show a clear direction. Important export sectors such as the automotive sector, mechanical engineering, the chemical industry and electrical equipment expect foreign business to remain more or less constant.

The recovery of German foreign trade thus seems to be delayed. The latest foreign trade data have been disappointing and the leading indicators are mostly cautious. Against this background and in view of the continuing geopolitical and trade policy risks, German foreign trade is likely to remain fairly subdued for the time being.

Reduction in order backlogs and weak demand dampen production

Production in the manufacturing sector also recently experienced a setback. According to the Federal Statistical Office, it fell by 2.5% in May compared to the previous month, after adjustment for price, calendar and seasonal effects. Output had more or less stagnated in April. Not only was output in the construction sector cut back by 3.3%, but industrial production was also reduced by 2.9%. In contrast, energy production increased again, by 2.6%.

The weakness in production in May was evident in a number of sectors of the economy: the largest declines were recorded in the areas of electrical equipment (-7.2%), mechanical engineering (-5.9%), pharmaceutical products (-5.4%) and motor vehicles/vehicle parts (-5.2%). Manufacturers of beverages (+3.2%), chemical products (+2.4%) and food and animal feed (+1.4%), on the other hand, were able to increase their output. Production in the particularly energy-intensive industrial sectors also increased slightly by 0.2%.

In the less volatile three-month comparison, industry recorded a slight increase of 0.4%, driven by the consumer goods (+1.3%) and intermediate goods (+0.9%) sectors. Weak demand for capital goods led to a decline of 0.3% in this area. In the construction industry, a stagnation of +0.1% was recorded in the three-month comparison due to the previously strong expansion.

The downward trend in new orders continued in May. Adjusted for price, calendar and seasonal effects, new orders in the manufacturing industry fell by 1.6% compared to the previous month. According to revised figures, they fell by 0.6% in April. The renewed decline was due to a marked drop in orders from abroad of -2.8%, especially from countries outside the eurozone (-4.6%). By contrast, domestic demand expanded slightly, by +0.5%. Unlike in the previous month, an above-average number of large orders were received in May. Adjusted for major orders, incoming orders were down 2.2% compared to the previous month. In a three-month comparison, incoming orders remain clearly on a downward trend, with a decline of 6.2% both from domestic (-6.4%) and foreign (-6.1%) markets.

The individual sectors of the manufacturing industry showed different trends: while fewer orders were received in the important sectors of mechanical engineering (-1.9%), motor vehicles/vehicle parts (-2.9%), pharmaceutical products (-2.4%) and other vehicle construction (-19.2%), they increased noticeably in the areas of data, electrical and optical equipment (+11.2%), metal production and processing (+3.8%) and chemicals (+1.7%).

Together with the recent deterioration in business expectations in the manufacturing industry, the ongoing declines in incoming orders initially point to a rather subdued industrial economy in the coming months. Only as global trade continues to recover and demand for industrial products gradually picks up will incoming orders and production stabilise.

Upward trend in consumer sentiment interrupted

The Federal Statistical Office is not expected to publish retail sales figures for the reporting month of May until the end of July. In April, price-adjusted retail sales (excluding motor vehicles) fell slightly by 0.2% compared to the previous month. Compared to April 2023, the retail sector reported a slight real increase in sales of 0.3%. Food sales were down 3.1% on the previous month and 0.8% on the previous year. Internet and mail order sales rose by 3.6% in April compared with the previous month and by 0.6% compared with the previous year. Sales of ICT and data processing equipment also increased compared with the previous month. New car registrations rose by 9.8% in June, and were 6.1% higher than in the same month of the previous year. In a more meaningful two-month comparison, registrations increased by 4.5% compared to the previous month. New car registrations by private individuals rose by 10.0% in June compared to the previous month. In a two-month comparison, after the high fluctuations in the previous months, an increase of 6.1% can be seen. New car registrations by companies and self-employed persons increased by 9.6% in May.

The mood among private households in Germany, as measured by the GfK consumer climate index and the HDE consumer barometer, has recently shown signs of a slowdown: the HDE consumer barometer fell slightly by 1.1 points in July, after five consecutive increases. According to GfK, the upward trend in consumer sentiment also came to a halt in June and July (forecast), with both income expectations and the propensity to buy and save having a negative impact. Overall, the recovery in consumer sentiment in Germany has come to a halt for the time being. However, private consumption is likely to pick up noticeably in the second half of the year as a result of rising wages, increasing employment and declining inflation rates.

Inflation rate has fallen again recently

The inflation rate (increase in prices within a year) fell slightly again in June. At +2.2%, it returned to its March and April level, after rising to +2.4% in May due to a base effect from the introduction of the 49-euro ticket in May 2023. The core rate (excluding energy and food) fell slightly in June to 2.9%, after +3.0% in May.

Food prices rose by 1.1% compared with the same month of the previous year; in May they had risen by +0.6%. Energy prices in June were again down more sharply than in May, when they had fallen by 1.1%, with a year-on-year decline of -2.1%. In the services sector, the price increase remained unchanged at +3.9% and thus continued to be above average.

In the upstream economic sectors, price declines continue to be observed in a year-on-year comparison. Producer prices fell by 2.2% in May compared to the same month of the previous year. In April, the rate was -3.3%. The decisive factor was once again the price declines in energy. Compared to the previous month, producer prices remained unchanged in May. Import prices in May were 0.4% lower than in the same month of the previous year, and thus remained unchanged compared to the previous month. Wholesale selling prices in May fell by 0.7% compared to the previous year. Compared to the previous month, they rose slightly by 0.1%.

Prices for natural gas on the spot markets have recently risen again. Currently, the TTF base load is at just under €31/MWh, around 16% above the level of the previous year. Compared to the previous month, they fell by around 10%. Market expectations indicate that natural gas prices will fluctuate around €30/MWh in the coming quarters. All in all, inflation is likely to continue to fall over the course of the year against the backdrop of price declines at the upstream economic levels, moderate energy exchange prices, the effect of the ECB's monetary tightening, reasonable wage settlements and a normalisation of corporate profit margins.

Labour market still characterised by weak economic momentum

The labour market figures continue to send out mixed signals: seasonally adjusted registered unemployment rose by 19,000 people, while underemployment increased by 16,000 people. At the same time, employment in May rose by 20,000 people and employment subject to social security contributions in April rose by +44,000 compared to the previous months, seasonally adjusted. In April, the number of people on short-time working rose to 242,000, while the number of companies reporting short-time working to the BA remained roughly unchanged in June compared to the previous month.

Current early indicators suggest that the previous trend will continue: the number of jobs registered with the BA is still falling and, according to the ifo employment barometer, companies' willingness to hire has again fallen slightly in June. The IAB labour market barometer gives a neutral labour market outlook for June, with the employment component developing slightly positively and the unemployment component slightly negatively. The expected overall economic recovery is likely to have a delayed impact on the labour market.

Early indicators suggest that the rise in corporate insolvencies has paused

According to final results, the number of corporate insolvencies rose by 5.8% in April compared to March. Compared to the same month of the previous year, the increase was 33.5%. At 1,906 cases, the highest figure since March 2017 (1,933) was recorded. In the first four months of 2024, corporate insolvencies were 28.3% higher than in the same period of the previous year and 4.1% above the average for the same period in 2016 to 2 019. 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 June 2024 shows the previously forecast second consecutive decline in the number of insolvencies of partnerships and corporations, with 1,169 cases. The figure was down 8.0% on the previous month of May (May: -7.0%). In the first half of 2024, the increase compared to the same period of the previous year was 35.1%. The IWH expects a slight increase in insolvency figures again in July. According to the IWH, no stable trend is yet recognisable for the remaining months.