The economic situation in Germany in May 2024

Economic development in Germany picked up slightly at the start of the year. According to a flash report from the Federal Statistical Office on 30 April, gross domestic product rose by 0.2% in the first quarter of 2024 compared to the previous quarter, adjusted for price, calendar and seasonal effects. Compared to the previous year, GDP was 0.9% lower. More recent data was taken into account for 2023, which led to a slight change in the course of the year and an increase in the annual GDP result for 2023 from -0.3% to -0.2%.

On the expenditure side, according to the Federal Statistical Office, growth impetus in the first quarter came primarily from construction investment, with the favourable weather conditions at the start of the year likely to have played a key role. Net exports (exports minus imports) also supported growth. By contrast, investment in equipment and private consumption are likely to have declined.

On the output side, value added in the construction and manufacturing sectors in particular is likely to have developed strongly in the first quarter. The still subdued consumer sentiment is reflected in the still subdued overall retail sales. In contrast, the other service sectors are likely to have stabilised growth.

The reported increase in GDP in the first quarter is generally in line with the assessment of the German government's spring projection, according to which there are signs of an economic recovery at the beginning of the year. However, this is also partly due to special effects in the construction sector and industry, such as mild weather and catch-up effects following the high sickness rate at the end of 2023. In particular, the weak development in private consumption and investment in equipment as well as the continued subdued order situation in industry do not yet indicate a broad, sustainable upturn - even if the improved sentiment indicators in the corporate sector and consumer-related services suggest an improvement. As the year progresses, the economic recovery should gradually consolidate and gain breadth and momentum in the wake of lower inflation rates, expected monetary policy easing, rising wages and incomes, a sustained stable labour market trend and increasing impetus from foreign trade. Nevertheless, the risks remain high in view of the geopolitical uncertainties.

Global economic activity continues its upward trend

Global industrial production increased by 0.6% in February compared to the previous month on a seasonally adjusted basis. The S&P Global sentiment indicator also points to a further moderate expansion of the global economy at the current margin: In April, it rose to 52.4 points in the wake of the improved outlook among service providers. Even though sentiment in the manufacturing sector deteriorated slightly from 50.6 to 50.3 points in April, the indices remain above the growth threshold of 50 points. It is fitting that the purchasing managers' indices in many European countries are now also above the growth threshold again.

Global trade is also benefiting from the upturn in global industrial production. In February, seasonally adjusted global trade in goods rose by 1.0% compared to the previous month. This was also the first year-on-year increase since March 2023. The RWI/ISL Container Throughput Index points to a further upward trend in March. While container throughput in the Chinese ports more or less stagnated, the North Range Index rose by more than 10% (from 103.7 to 114.9 points). Although the higher level of activity in European ports is likely due in part to the economic recovery, according to RWI, delayed deliveries as a result of the disruption to shipping traffic in the Red Sea and the necessary diversions of freighters probably also contributed to the increase in the March figure.

According to the latest forecasts by international organisations, the momentum of global trade is likely to approach that of global GDP again this year following the previous weak phase. Even if the sales prospects for the German export industry are slowly brightening, they remain subdued in a longer-term historical comparison.

Foreign trade up significantly in the first quarter

In March, nominal exports of goods and services expanded again slightly by 0.8% compared to the previous month, adjusted for seasonal and calendar effects, after falling by 0.3% in February. Demand for goods from countries outside the eurozone in particular contributed to the increase. Imports of goods and services, on the other hand, fell slightly by 0.3% compared to the previous month. While trade in goods with EU countries was back in positive territory, imports from third countries fell; imports of goods from Russia continued their downward trend. Overall, the monthly trade surplus widened from 16.7 billion euros in February to 18.6 billion euros in March on a seasonally adjusted basis, with a slight increase in exports and a slight decrease in imports.
In a quarter-on-quarter comparison, nominal exports of goods and services were +3.5% higher in the first quarter than in the previous quarter, following the decline in the final quarter of 2023. Imports of goods and services also increased by +1.5% compared to the previous quarter.

In terms of foreign trade prices, price increases for intermediate goods and consumer goods were noticeable in a month-on-month comparison. In March, import prices rose by 0.3% on a seasonally adjusted basis compared to the previous month. At the same time, export prices fell slightly by -0.1%, partly due to lower prices for energy exports. This means that the terms of trade, i.e. the ratio of export to import prices, deteriorated slightly compared to the previous month for the first time since October 2023.

There is still light and shade in the leading indicators. Incoming orders from abroad rose by 2.0% in March compared to the previous month on a seasonally adjusted basis, after falling in January and February. Significantly more new orders were received from the eurozone in particular (+10.6%), while the other trading partners placed fewer orders than in the previous month (-2.9%). Large orders from abroad did not play a role in March. The ifo export expectations were slightly more negative again in April at -2.0 after -1.2 points. While manufacturers of data processing equipment and some energy-intensive sectors (e.g. manufacture of glass and ceramics, chemicals, paper) expect exports to increase, foreign demand is expected to decline in just as many sectors (e.g. metal producers and processors, manufacturers of textiles, electrical equipment). Overall, the companies surveyed by ifo again assess their order backlogs from abroad as worse than in the previous month.

The latest development indicates a trend reversal in German foreign trade. According to a flash report from the Federal Statistical Office, foreign trade had a positive impact on GDP development in the first quarter. Together with the positive signals from a number of leading indicators, this supports the expectation of a moderate recovery in exports. However, the slight decline in the PMI for the eurozone in the April reporting month shows that the signs of recovery in industry are still subject to a high degree of uncertainty.

Production growth in the first quarter despite a setback in March

Production in the manufacturing sector fell slightly by 0.4% in March compared to the previous month, adjusted for price, calendar and seasonal effects, after increases of 1.3% and 1.7% were recorded in January and February respectively. Manufacturing in the industrial sector also fell by 0.4% recently, following increases of +1.3% in January and +2.0% in February. However, output in the construction industry increased by 1.0%, following significant increases of 2.9% and 4.2% in January and February respectively. Energy production fell again by 4.2%.

Within industry, different trends were observed in the individual economic sectors in March: While production increased in the motor vehicles/vehicle parts (+0.6%), electrical equipment (+0.6%) and metal products (+0.3%) sectors, it decreased in mechanical engineering (-1.0%) and pharmaceutical products (-0.3%).

Production in the particularly energy-intensive industrial sectors remained unchanged overall, following significant increases of 4.3% and 4.6% in January and February respectively. Here, too, the individual developments varied: Growth in chemical products (+2.0%) was offset by declines in coking and petroleum refining (-4.5%), glass, glassware and ceramics (-1.5%), metal production and processing (-1.3%) and paper and cardboard (-0.4%).

In a more meaningful quarter-on-quarter comparison, there was noticeable growth of 0.7% and 1.0% in industry and the manufacturing sector as a whole, despite the recent setbacks. In the construction industry, there was even an increase of 3.9% in the first quarter compared to the previous quarter, with the mild weather probably playing a role.

In March, new orders fell slightly by 0.4% compared to the previous month, adjusted for price, calendar and seasonal effects. There had already been a decline in February (revised: -0.8%). While 3.6% fewer orders were received from Germany, orders from abroad rose by 2.0%, which was due to a significant increase in demand from the eurozone of +10.6%. In contrast, orders from outside the eurozone fell by 2.9%.

The development of demand in the individual sectors of the manufacturing industry was mixed: the sharpest declines were recorded by manufacturers of metal products (-4.5%), metal production (-3.5%) and other vehicles (-2.3%). In contrast, producers of clothing (+7.0%) and electrical equipment (+5.9%) recorded significant growth rates. The important automotive industry also reported an increase in orders (+1.1%).

The development of incoming orders in the manufacturing industry has been characterised by large orders in recent months and has been subject to strong fluctuations, but is still trending downwards. The continued brightening of the ifo business climate and the purchasing managers' index suggest a recovery in industrial production over the remainder of the year.

Brightening sentiment in the retail sector

Price-adjusted sales in the retail sector (excluding motor vehicles) rose noticeably by 1.8% in March compared to the previous month, following a decline in the previous four months. In a year-on-year comparison, the retail sector reported real sales growth of 0.3%, following a decline of 2.3% in February. Food retail also reported rising sales in a month-on-month and year-on-year comparison (+3.6% and +3.9% year-on-year respectively). Internet and mail order sales increased by 3.3% in March (-1.9% year-on-year). A month-on-month decline in sales was recorded for ICT and data processing equipment as well as furniture and furnishings.

New car registrations overall rose by 1.3% in April compared to the previous month (compared to the same month last year: +19.8%). In a more meaningful two-month comparison, however, registrations fell by 3.9%. New car registrations by private individuals increased by 3.1% in April compared to the previous month. In a two-month comparison, a decline of 7.5% was recorded after high fluctuations in the previous months. New car registrations by companies and the self-employed increased by 0.4% in April (March: +2.4%).

Sentiment among private households in Germany, as measured by the GfK consumer climate index and the HDE consumer barometer, has recently shown signs of bottoming out: In May, the HDE consumer barometer rose for the fourth time in a row to its highest level since the end of 2021: according to GfK, the consumer climate also increased slightly again in April and the forecast for May is pointing upwards, with income expectations in particular having a positive effect. Overall, leading indicators are trending increasingly upwards, albeit from a low level. In the wake of rising wages and falling inflation rates, private consumption should gradually recover.

Inflation remains at a low level

The inflation rate (price level increase within a year) remained unchanged at 2.2% in April. In January and February, it was 2.9% and 2.5% respectively. Inflation has thus been on a downward trend since March 2023. The core rate (excluding energy and food) fell to 3.0%, down from 3.3% in March. Food prices rose by 0.5% in April compared to the same month last year, after falling in March for the first time since February 2015. Energy prices, on the other hand, continued to fall compared to the same month last year, most recently by 1.2%. In the services sector, prices continued to rise at an above-average rate of +3.4 %.

A slowdown in price declines can be observed at the upstream economic levels. Producer prices fell by 2.9% in March compared to the same month last year. In February, the rate was -4.1%. The main reason for this was the fall in energy prices. Compared to the previous month, producer prices rose by 0.2% in March. Import prices in March were 3.6% lower than in the same month last year (+0.4% compared to the previous month). Wholesale sales prices fell by 3.0% in March compared to the previous year. Compared to the previous month, they rose by 0.2 %.

On the spot markets, prices for natural gas have recently fallen again. At around €30/MWh, the TTF base load is currently around 16 % below the previous year's level. However, there has been an increase of almost 10 % compared to the previous month. Market expectations indicate that natural gas prices will hover around €30/MWh in the coming quarters.

In the coming months, there could be slightly higher inflation rates again - at least temporarily: The VAT reduction on gas and district heating expired on 1 April and the price-reducing effects of the €49 ticket, which was introduced a year earlier (base effect), will no longer apply from 1 May. Prices for services are also more persistent in view of significant wage increases, which have a greater impact here due to the higher proportion of labour costs.

All in all, however, inflation-dampening factors such as continued price declines at the upstream economic levels as a result of lower energy exchange prices, the effect of the ECB's monetary policy tightening, appropriate wage settlements and a normalisation of corporate profit margins should retain the upper hand as the year progresses.

Weak economy leaves its mark on the labour market

Even in April, the usual spring recovery on the labour market failed to gain momentum in the wake of the weak economy: the upward trend in unemployment continued with a seasonally adjusted increase of 10,000 people. At the same time, employment also continued to rise in March (+8,000 people), albeit at a slower pace. As has been the case since last year, the increase in employment is solely attributable to foreign workers. Employment subject to social insurance contributions rose by 9,000 people in February (sb, January: +22,000 people). Short-time work due to the economic downturn rose to 204,000 people in February and, according to reports to the BA, will continue to increase.

Despite the economic weakness, the labour market continues to develop quite robustly. Job growth in the service sector continues to outstrip job losses in cyclically sensitive sectors such as industry and construction. Individual leading indicators have recently deteriorated somewhat: The number of jobs registered with the Federal Employment Agency has continued to decline and companies' willingness to hire also fell slightly in April, according to the ifo Institute. However, the IAB labour market barometer indicates a trend towards improvement. With the expected economic recovery and the ongoing employment of refugees from Ukraine, the situation on the labour market is likely to pick up again later in the year.

Rise in corporate insolvencies continues

According to final results, corporate insolvencies rose by 10.0% month-on-month in February 2024 (compared to the same month of the previous year: +31.1%) to 1,785. This is the highest monthly growth rate since March 2022. The figure was also 8.0% above the February average of the 2016-2019 pre-coronavirus level. The trend of rising insolvencies that began in mid-2022 is therefore continuing. The catch-up effects of the coronavirus pandemic and the difficult economic environment for many companies continue to contribute to this. While the number of employees affected (-17.7%) fell compared to the previous month, the expected claims (+15.3%) increased.

The IWH insolvency trend for April 2024 shows 1,367 insolvencies of partnerships and corporations, the third consecutive month with a record high since recording began in January 2016. However, the IWH expects insolvency figures to fall from May or June at the latest, with early indicators pointing to an easing of the ‘currently still exceptionally high number of insolvencies’.