The economic situation in Germany in October 2024

Current economic indicators suggest that the German economy remained weak in the past quarter. On average, industrial production in July and August was 1.4 per cent below the level of the second quarter, and current sentiment indicators do not yet point to a recovery either. In September, the ifo business climate index deteriorated for the fourth month in a row, with corporate sentiment clouding over with regard to both current business and the months ahead. In particular, the manufacturing sector saw a significant decline to its lowest level since June 2020 due to the persistently weak order situation and declining capacity utilisation.

The economic weakness is also increasingly reflected in the sentiment of service providers – a sector whose momentum has had a stabilising effect until recently. The business climate in the service sector has deteriorated, especially with regard to the current situation, while expectations are somewhat less sceptical. In particular, sentiment in tourism and hospitality has improved, while retailing remains pessimistic.

Despite the disappointing trend in consumer sentiment in recent months, current indicators suggest that consumer spending by private households in Germany is bottoming out. According to the latest data published by the Federal Statistical Office, retail sales recovered noticeably in July and August. New car registrations by private individuals also increased markedly in September, although in the third quarter they were still a good 2 per cent down on the previous quarter after seasonal adjustment. Overall, however, private consumption is likely to stabilise to a certain extent. Nevertheless, concerns about job security and geopolitical crises continue to pose risk factors for a sustained recovery in consumer sentiment.

In its autumn forecast, the German government expects a renewed slight decline in overall economic value added in the third quarter, which, following the slight decline in the second quarter, would meet the definition of a ‘technical recession’. This means that the economic downturn is likely to continue in the second half of 2024 before growth is expected to gradually pick up again next year. The economic upturn is initially likely to be driven by a recovery in private consumption, before exports increase in the further course of the year as foreign demand picks up, leading to a turnaround in investment. This recovery will be supported and strengthened by the supply-side and demand-side policy measures of the growth initiative, which includes numerous proposals for stronger work incentives, reducing bureaucracy and improving the economic environment for companies, and forms the basis for a reliable, investment- and growth-oriented economic policy.

Mixed momentum in the global economy

Global industrial production is still developing sluggishly. In seasonally adjusted terms, it stagnated in July compared with the previous month, but compared with July 2023 it is still up 1.8 %. Leading indicators suggest weak global production development overall for the third quarter. In September, the S&P Global sentiment indicator was above the growth threshold, but a decline from 52.8 to 52.0 points indicates a slightly slower pace of expansion than in August. The renewed deterioration in sentiment in industry points to a decline in production, while growth in the services sector is likely to continue, albeit at a slower pace. International organisations expect the global economy to develop robustly in the coming years. However, the pace of expansion is likely to remain lower than observed before the pandemic, with average annual growth rates of just over 3 %. The easing of monetary policy should stimulate investment and economic activity from next year onwards by creating more favourable financing conditions.

Weak global demand for industrial goods continues to be reflected in international trade. In seasonally adjusted terms, it fell by 0.3 % in July compared with the previous month and was thus only 1.7 % higher than in the same month of the previous year, despite the phase of weakness in 2020. In addition to economic factors, structural effects resulting from protectionist measures and latent trade conflicts are also having an impact. The RWI/ISL Container Throughput Index pointed to a further recovery in global trade in August, with a seasonally adjusted increase from 132.2 to 134.4 points, with container throughput expanding in both Chinese ports and the northern eurozone. However, the gap between container throughput in Europe and the rest of the world, which has emerged since 2022, remains wide.

Trade surplus continues to grow in August

German foreign trade is still not picking up. In August, nominal exports of goods and services, seasonally and calendar adjusted, fell by 0.8% compared to the previous month. Imports of goods and services fell even more sharply compared with the previous month, by 3.4%, due in particular to the decline in deliveries from the euro area. Against the background of the growth differential between exports and imports, the monthly trade surplus increased markedly in August from EUR 10.8 billion to EUR 14.2 billion.

In seasonally adjusted terms, import prices fell again in August by 0.4 % compared with the previous month, and export prices also fell by 0.1 %. Overall, price declines in the manufacturing and intermediate goods sectors were reflected in foreign trade. The terms of trade improved accordingly by 0.3 % compared to July. In real terms, exports and imports probably fell slightly less.

The leading indicators also point to modest export activity in the coming months. Following the previous increases, new orders from abroad fell by a seasonally adjusted 2.2% month-on-month in August. Orders from the euro area shrank significantly by 10.5%, while demand from the other countries expanded by 3.4%. Excluding major orders, foreign orders were down 5.6% on the previous month. By contrast, in the less volatile three-month comparison, foreign orders rose overall for the first time since February, by +1.8%. According to the PMI survey on export conditions, the outlook for German exporters remains muted despite the slight increase in the index to 50.7 points in August. Even though demand from the US and Asia accelerated, the index for new orders from abroad signalled noticeable declines in August, particularly in the automotive sector. The ifo export expectations also continued to fall in September, dropping to -6.3 balance points. In particular, the automotive and metal industries expect significant declines in exports by the end of the year.

The German export sector continues to suffer from the sluggish global production and investment cycle. But export growth is also being dampened by structural factors, not least by increasing competition from China in important industrial sectors such as automotive and mechanical engineering. Overall, the latest figures for the third quarter point to a further decline in foreign business.

Rise in production partially offsets losses of previous month

After production had fallen in July, partly due to holiday-related effects, it recovered in August. In August, production in the manufacturing industry rose by 2.9% compared to the previous month, after price, calendar and seasonal adjustments. According to revised data, output in July had fallen by 2.9 %. With a plus of 3.4 %, industrial production was able to fully offset the losses of the previous month. The increase in energy production was slightly lower at 2.3 %. Output in the construction industry rose only slightly by 0.3 %.

Within industry, the development varies from one economic sector to the next in a month-on-month comparison: production declines were recorded in the important mechanical engineering sector (-0.9%), among manufacturers of food and animal feed products (-3.8%), chemical products (-1.8%) and data processing equipment, electrical and optical products (-0.9%). By contrast, manufacturers of motor vehicles and motor vehicle parts (+19.3%), metal products (+1.3%), electrical equipment (+3.2%) and rubber and plastic products (+2.2%) reported increases, some of them significant.

Despite the recent positive development, production in the manufacturing sector as a whole, as well as in industry, continued to decline in the more meaningful three-month comparison at -1.3%; in the construction industry, the decline was 1.8%. The energy sector recorded a slight increase of 0.4%, and production in energy-intensive industries also increased slightly by 0.7%.

New orders in the manufacturing industry fell again recently, after having increased at a low level in the two previous months. In August, they fell by 5.8% compared to the previous month, after adjusting for price, calendar and seasonal effects. This has dashed hopes that orders might have bottomed out. In particular, fewer orders were received from the domestic market (-10.9%), but foreign business also declined (-2.2%). Excluding the highly volatile large orders, the decline in orders was somewhat less pronounced at 3.4% compared to the previous month.

Developments varied across the individual sectors of the manufacturing industry: while the pharmaceutical products (+7.3%), mechanical engineering (+6.9%) and metal production (+3.3%) segments recorded noticeable increases, the automotive/automotive components (-0.5%), chemicals (-3.2%), data , electrical and optical equipment (-5.0 %), electrical equipment (-6.6 %), metal products (-14.1 %) and, in particular, other transport equipment (-50.9 %), which is heavily influenced by major orders.

There are still no signs of a recovery in industrial activity. Sentiment indicators in the manufacturing sector remain gloomy. In particular, incoming orders were unable to continue the slight upward trend of recent months in August and remain at a low level. Therefore, a subdued development of the manufacturing sector in Germany is to be expected for the time being.

Retail sales slightly higher overall

Price-adjusted retail sales (excluding motor vehicles) rose by 1.5% in July and 1.6% in August compared with the previous month. Compared with the same month of the previous year, retail reported a real increase in sales of 2.0% in August. Food sales rose in August both in the previous month and in the year-on-year comparison (+1.9% and +2.4% respectively).

Internet and mail order sales rose very significantly in August by 8.9% (+10.6% year-on-year). In 2022 and 2023, the online sector had still been suffering from severe declines in sales due to the expiration of the coronavirus measures and high inflation.

New car registrations fell slightly by 0.1% overall in September, but were again well below the level of the same month last year, at 7.0%. In the more meaningful three-month comparison, registrations in September fell by 4.4%. New car registrations by private individuals in September were up 4.5% on the previous month. The three-month figure shows a decline of 2.3%. New car registrations by companies and self-employed persons fell by 2.3% in September. The three-month figure shows a decline of 5.4%.

The mood among private households in Germany was recently mixed, according to the HDE consumer barometer and the GfK consumer climate. The HDE consumer barometer fell again in October, while the GfK consumer climate rose by 0.7 points to 21.2 points. However, the GfK reported a decline of 3.3 points to -21.9 points for September. According to the institute, positive effects recently included improved income prospects, after dampening factors in the wake of the geopolitical crises and increased job insecurity dominated in previous months.

The ifo business climate index for retail trade, including motor vehicles, fell by 2.5 points in September and, at -25.6 points, remains well into negative territory. Assessments of the current situation deteriorated by 1.4 points to -17.2 points. Expectations fell by 3.4 points to -33.6 points.

After the disappointing developments of the past months, the current early indicators suggest that consumer sentiment in Germany is bottoming out. However, concerns about job security and geopolitical crises continue to pose risk factors for a sustained recovery of consumer sentiment.

Inflation rate falls to 1.6 per cent

The inflation rate, i.e. the increase in consumer prices within a one-year period, fell to +1.6% in September, having amounted to +1.9% in August. This means that the rate was well below the ECB target for the entire eurozone of 2%.

The main reason for this was a temporary price-dampening effect due to cheaper energy. In September, energy prices were down again noticeably year on year at -7.6 %. The negative year-on-year rates that have been observed for some time are likely to disappear soon due to the low energy prices since the fourth quarter of 2023 (basis effect). Food price inflation has risen steadily in recent months. Prices here were 1.6 % higher than in the same month of the previous year.

The core rate (excluding energy and food) fell slightly further to +2.7 % in September. This was mainly due to the still above-average price pressure of +3.8 % in the services sector compared to the previous year.

Although prices at the upstream economic levels have been trending slightly higher again since the spring compared with the previous month, they continue to have a dampening effect on the inflation rate overall: Producer prices rose slightly by 0.2% in August compared with July. However, they fell by 0.8% year-on-year. This was mainly due to the continued decline in energy prices. In August, import prices fell by 0.4 % compared with the previous month and were up slightly (+0.2 %) on the same month of the previous year. Wholesale selling prices fell by 0.8 % in August compared with the previous month and by 1.1 % compared with the same month of the previous year.

On the spot markets, natural gas prices have remained quite moderate in recent weeks; at around €40/MWh, the TTF base load was currently around 24% below the level of the previous year. Compared to the previous month, it fell by around 11.5%. Market expectations suggest that natural gas prices will remain below the €40/MWh mark in the coming quarters. The price of crude oil (Brent) increased by almost 15% compared to the previous month and most recently stood at €74/bl; it was down almost 12% on the previous year.

Despite the fact that the dampening effect of energy prices will cease to apply in the future, inflation should remain moderate for the rest of the year thanks to small price increases at the preceding economic levels, comparatively low energy exchange prices, the monetary policy reactions of the ECB, moderate wage agreements and the normalisation of corporate profit margins.

Autumn revival on the labour market falls short of expectations

The economic weakness also affected the labour market in September. Seasonally adjusted registered unemployment and underemployment increased markedly by 17,000 and 14,000 respectively in September. While short-time working due to the economic situation fell slightly in July compared to June, it has increased by 105,000 people compared to the previous year. The number of notifications of short-time working to the BA increased again after the end of the holiday season in September. For the first time in a year, seasonally adjusted employment fell by 21,000 in August compared to July, but was still 136,000 higher than a year ago. After a decline in the previous month, seasonally adjusted employment subject to social security contributions rose by 25,000 in July.

The leading indicators suggest that sentiment on the labour market will remain subdued: the IAB labour market barometer deteriorated slightly in September, with the employment component falling noticeably. Although the number of job vacancies reported to the BA fell only slightly, the ifo employment barometer again points to a significant decline in companies' willingness to hire new staff, particularly in industry and trade. The prospects of a revival in the labour market over the rest of the year have thus dimmed again.

Corporate insolvencies rise again after decline

According to final results from the Federal Statistical Office, the number of corporate insolvencies rose in July by 17.2% compared with the previous month and 22.1% compared with the same month of the previous year. This follows a sharper decline (-14.5%) in June. At 1,937 cases, the previous annual high in May was slightly exceeded. In addition, insolvencies were 15.5% above the July average of the pre-corona level of the years 2016 to 2019. A number of developments are seen as the causes of the continued dynamic insolvency situation, including the still subdued economic development, structural challenges and catch-up effects from the period of the corona years, which were characterised by special regulations and historically low insolvency figures.

The IWH Insolvency Trend for September shows 1,303 insolvencies of partnerships and corporations, a slight increase of 1.6% compared to the previous month and +28.2% compared to the same month last year. Based on leading indicators, the IWH expects a further increase in insolvency figures in the coming months.