The economic situation in Germany in June 2024

After the economic revival at the beginning of the year, which was probably due to special effects related to the weather and pent-up demand, the first indicators for the second quarter are currently still giving a mixed picture of further economic development. The noticeable improvement in sentiment indicators since the beginning of the year in industry, construction and also in the service sector, and the improved framework conditions are only gradually being reflected in the "real" economic data.

In the manufacturing industry, incoming orders (including large orders) have been trending downwards until recently – albeit with decreasing momentum – and the increases in production that were observed at the beginning of the year did not continue in March and April. While construction output, which had been boosted by favourable weather conditions at the beginning of the year, fell again sharply in April by 2.1%, manufacturing continued its upward trend with a gain of 0.2%.

The dramatic situation in the regions of Bavaria and Baden-Württemberg affected by the flooding is likely to lead to temporary production disruptions and short-time working in some of the companies located there. However, as similar events in the past have shown, these regional restrictions are unlikely to have a lasting impact on the economy as a whole. As a rule, temporary production stoppages can be made up for relatively quickly, especially if the order situation is on the decline and capacities are not being fully utilised. The truck toll mileage index, which is an early indicator of production, fell again slightly in May, which is why no noticeable growth impulses are to be expected from the manufacturing industry in the short term.

The expected economic recovery is therefore likely to come primarily from consumer-related service sectors: sentiment among private consumers, as measured by the ifo business climate in the retail sector, the GfK consumer climate and the HDE consumer barometer, has been steadily improving. In the first quarter of 2024, real wages rose by 3.8% compared to the same quarter of the previous year, the fourth consecutive increase and the strongest real wage growth year-on-year since the beginning of the time series in 2008. The wage increase was disproportionately high for low earners in particular, which is due not only to the collectively agreed wage increases but also to the payments of tax- and contribution-free inflation compensation premiums, which account for a relatively large share of these.

Nevertheless, in view of these favourable conditions, retail sales have recently been very subdued. In the coming months, however, a temporary upturn in consumer-related sectors such as retail, catering and the hotel industry is expected in the wake of the European Football Championship – albeit not to the same extent as during the 2006 World Cup. However, for a sustainable economic recovery to occur, a broad-based recovery in domestic demand is needed, as well as further tangible impetus from the external sector.

Global economic outlook continues to brighten

In March, global industrial production fell again slightly compared to the previous month, down 0.3% in seasonally adjusted terms, but was still up 1.2% compared to the same month of the previous year. Leading indicators suggest that the global industrial economy will recover in the coming months. The S&P Global sentiment indicator, for example, rose quite significantly in May, by 1.3 points to 53.7 points. The mood in the manufacturing sector has brightened again somewhat (from 50.3 to 50.9 points) and is stabilising above the growth threshold of 50 points. The services sector contributed particularly significantly to the increase in the overall index, with an increase from 52.7 to 54.1 points. In the eurozone, too, the latest sentiment indicators, such as the Sentix indicator of capital investors or surveys of purchasing managers, are signalling that the economic recovery is likely to gain momentum as the year progresses. This is because the end of the reduction in excess inventories, particularly of intermediate and capital goods, should increasingly provide a tailwind for industry.

Together with the beginning of the loosening of monetary policy and the resulting more favourable financing conditions for companies and private households, demand for German products from abroad and world trade should benefit from this.

In March, global trade in goods fell slightly again, by 0.6% compared with the previous month, but the RWI/ISL Container Handling Index rose slightly in April, from 128.1 to 128.8 points, continuing its upward trend. While container handling in Chinese ports rose, the North Range Index fell back after the strong increase in the previous month. Nevertheless, the index still points to a recovery in the EU. Since container handling is back close to its long-term trend, world trade should have overcome the recent burdens. The expected recovery in world trade should increasingly provide impetus for German exports in the future. However, since demand from important trading partner regions such as the EU is only expected to pick up slowly according to the forecasts of international organisations, German sales markets are initially expected to be somewhat less dynamic than world trade.

Trade in goods continues to rise in April

In April, nominal exports of goods and services continued to recover compared to the previous month, with a seasonally and calendar-adjusted increase of +0.5%. In particular, trade in goods with countries outside the EU expanded, especially with the United Kingdom. Imports of goods and services rose significantly more strongly (+2.5% compared to March 2024), mainly due to a significant increase in imports of services (+4.1%) and goods from the EU (+4.3%). At the beginning of the second quarter, both exports and imports continued the recovery that began at the turn of the year. The monthly trade surplus was significantly lower than in the previous month (€18.7bn) at €15.8bn, with imports increasing more than exports.

In terms of foreign trade prices, price increases for goods in the manufacturing industry were recorded in particular compared with the previous month. Seasonally adjusted, import prices rose by 0.7% in April compared with the previous month, partly because prices for oil and gas imports rose compared with the previous month. Export prices also rose by 0.4%. This means that the terms of trade have continued to deteriorate compared with the previous month, with a decline of 0.3%. In real terms, the increases in both exports and imports are likely to have been somewhat weaker.

The leading indicators point to a further moderate recovery in foreign business. Incoming orders from abroad in April were seasonally adjusted and moved sideways at 0.1% compared to the previous month, after expanding by 0.8% in March. In particular, fewer orders were received from the eurozone, down 1.4%. Excluding large orders from abroad, new orders were up by a strong 4.5%. In May, the ifo export expectations were in positive territory again for the first time since April 2023, at 0.3 points. However, there is still little momentum in important export sectors such as mechanical engineering and the automotive sector. In May, the companies surveyed by ifo again rated their order backlogs from abroad better overall than in the previous month.

Overall, the recovery in German foreign trade appears to be consolidating. Positive signals from foreign business in important sectors such as chemicals and upward-pointing purchasing manager indices for the eurozone support the expectation of a further increase in German exports. However, momentum remains subdued overall and high geopolitical and trade policy risks persist.

Industrial production up slightly in April

According to the Federal Statistical Office, production in the manufacturing industry almost stagnated in April, with a decline of 0.1% compared to the previous month. It had already fallen slightly in March (-0.4%) after the previous significant increases. While construction output fell again significantly in April, by 2.1%, industrial output was up slightly, by 0.2%. Energy production increased noticeably by 1.6% after the previous declines.

Within industry, a weaker trend was observed in several sectors in April: while production in the automotive/automotive parts sector expanded strongly at +4.2%, it was curbed in the case of pharmaceutical products (-1.6%), electrical equipment (-0.8%), metal products (-1.0%) and mechanical engineering (-0.5%). In April, production in the particularly energy-intensive industrial sectors was also down by 0.9%. The increases in the coking and mineral oil processing sectors (+4.2%) or paper and cardboard (+1.1%) were not enough to offset the production declines in the important chemical products sector (-1.8%) or in the glass, glassware and ceramics sector (-1.9%).

In the less volatile two-month comparison, however, production continued to expand in industry (+0.6%), among capital goods producers (+1.2%) and particularly in the energy-intensive sectors (+1.5%). In the construction industry, on the other hand, the favourable weather at the beginning of the year dampened the usual seasonal recovery, resulting in a decline of 0.5% in the two-month comparison.

Incoming orders in April were down slightly on the previous month (-0.2%). This means that the negative trend that has persisted since the beginning of the year is continuing, albeit at a much slower pace. In March, there was a revised decline of 0.8%. Lower demand was recorded in particular from within Germany (-0.3%), while orders from abroad stagnated (-0.1%). A decline in orders from the eurozone (-1.4%) was offset by an increase in orders from outside the eurozone (+0.6%).

Once again, the development in the individual economic sectors of the manufacturing industry was very uneven: manufacturers of other vehicles (-15.4%), which in the past were characterised by very large orders, as well as of data, electrical and optical equipment (-5.1%) and electrical equipment (-4.1%) recorded significantly fewer orders. In contrast, there were noticeable increases in orders in the areas of textiles (+10.9%), motor vehicles and parts (+4.1%) and metal production (+3.3%).

Despite the renewed decline in incoming orders in the manufacturing industry, the value adjusted for major orders in April shows a strong increase of 2.9%. In particular, major orders from other European countries have recently led to high monthly fluctuations. For the rest of the year, sentiment indicators such as the ifo business climate and purchasing managers' indices point to a gradual recovery in domestic and foreign demand, which should also lead to a reversal of the trend in incoming orders.

Slight decline in sales despite brighter sentiment

In April, price-adjusted retail sales (excluding motor vehicles) fell slightly by 0.2% compared to the previous month. Compared to April 2023, retail sales reported a slight real increase in sales of 0.3%. Food sales declined both month-on-month and year-on-year (-3.1% and -0.8% respectively). Sales in the internet and mail order business increased by 3.6% in April (+0.6% yoy). Sales increases were also recorded in the trade in ICT and data processing equipment compared with the previous month. New car registrations fell by 2.0% in May (compared with the same month of the previous year: -4.3%). In the more meaningful two-month comparison, registrations fell by 1.0%. In May, new car registrations by private individuals fell by 1.6% compared with the previous month. In the two-month comparison, a decline of 3.0% was recorded, following high fluctuations in the previous months. New car registrations by companies and self-employed persons fell by 2.1% 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 a noticeable improvement: In June, the HDE consumer barometer rose for the fifth time in a row to its highest level since August 2021. According to GfK, the consumer climate also increased slightly again in May and the forecast for June is upward, with income expectations and the decline in the propensity to save having a particularly positive impact. Overall, the early indicators are increasingly pointing to a recovery, albeit from a low level. The European Football Championship is also likely to provide a temporary boost to the retail sector. As wages rise and inflation rates fall, the recovery trends should gradually consolidate in the second quarter.

Slight increase in inflation due to base effect

The inflation rate (increase in price levels within a year) rose slightly to +2.4% in May. As expected, it was slightly higher than in March and April, when it was +2.2%. This was mainly due to a base effect from the introduction of the 49-euro ticket in May 2023. The core rate (excluding energy and food) remained at 3.0% in May.

Food prices rose by 0.6% compared to the same month of the previous year, after +0.5% in April. Energy prices continued to fall in May compared to the same month of the previous year, but at a decreasing rate. In the services sector, the price increase remained above average at +3.9%.

In the upstream economic sectors, prices continued to fall year-on-year. Producer prices fell by 3.3% in April compared with the same month of the previous year. In March, the rate was -2.9%. The main factor here was the fall in energy prices. However, compared with the previous month, producer prices rose by 0.2% in April. In April, import prices were 1.7% lower than in the same month of the previous year (+0.7% compared to the previous month). Wholesale selling prices fell by 1.8% year-on-year in April. Compared to the previous month, they rose by 0.4%.

Prices for natural gas on the spot markets have recently risen again. At just under €34/MWh, the TTF base load is currently around 36% above the level of the previous year. Compared to the previous month, the gas price rose by almost 20%. Market expectations indicate that natural gas prices will fluctuate around €30/MWh in the coming quarters.

In the coming months, opposing effects are likely to balance each other out: on the one hand, price declines are expected at the upstream economic levels, further slight declines in energy prices and a normalisation of corporate profit margins. On the other hand, higher prices for services are likely to continue in view of significant wage increases, which have a greater impact here due to the higher labour cost share.

Labour market still characterised by weak economic momentum

The trend of recent months on the labour market continued in May: seasonally adjusted registered unemployment rose by 25,000 people. Underemployment, which better reflects the underlying economic momentum, rose by 15,000 people. In April, the number of people in employment rose again by 25,000; as in the previous months, the increase in employment is mainly due to the service sectors such as health and social services and public services, which more than compensate for the job cuts in the economically sensitive sectors of temporary employment, manufacturing and construction. In March, the number of people on short-time working due to the economic situation rose to 219,000; according to the BA, this figure is likely to fall in the course of the year, although the effects of the flooding in Bavaria and Baden-Württemberg, which has led to production stoppages and short-time working in some of the affected companies located there, are not yet likely to be reflected in the figures.

Current early indicators are sending out mixed signals, but overall they point to a continuation of the previous trend: the number of jobs registered with the BA is continuing to fall and the IAB labour market barometer fell slightly below the expansion threshold of 100 points again in May. By contrast, the willingness of companies to hire increased slightly in May according to the ifo employment barometer. In the short term, the European Football Championship could provide a positive boost to the labour market in the coming months, with consumer-related services such as the hotel and catering industry and transport benefiting.

Corporate insolvencies: first decline after record highs

The IWH insolvency trend shows 1,271 insolvencies of partnerships and corporations for May 2024. This is 7% less than in the previous month. The IWH also expects further declining figures for the coming months. However, the insolvency figures are still at an elevated level: the current figure is still 40% higher than in May 2023 and 31% above the May average for the years 2016 to 2019, i.e. before the corona pandemic.