The economic situation in Germany in September 2024

The German economy continues to stagnate at the beginning of the third quarter. Industrial production is still in a downturn, mainly due to the ongoing decline in foreign demand and falling order volumes; recently, important service sectors such as trade, transport, hospitality and other service providers have also been trending weaker. The current assessment of developments in the service sector is complicated by the fact that data availability for business statistics in the trade and services sectors is currently very limited due to the changeover.

Current sentiment and leading indicators do not suggest any short-term economic recovery. Industrial production and incoming orders (adjusted for major orders) fell again in July, although holiday-related special effects are likely to have played a role in production. The ifo Business Climate Index fell for the third time in a row in August, with companies recently assessing both the current situation and business expectations more pessimistically. The index fell particularly sharply in the manufacturing industry, which may be partly explained by the expected slowdown in growth in key sales markets, particularly the US and China. In view of the continued weak foreign demand, the ongoing geopolitical uncertainties and the only gradual and delayed easing effects of monetary easing, the industrial downturn is likely to continue for the time being and dampen export-oriented German industry.

The business climate also continued to deteriorate in the services sector, particularly with regard to business expectations. Despite the decline in inflation and the significant increase in purchasing power due to higher real wages, key sentiment indicators for private households, namely the GfK consumer climate and the HDE consumer barometer, have recently trended weaker.

In view of this, most economic research institutes are assuming in their autumn forecasts that economic stagnation will continue in the second half of the year and that an economic upturn will only come about in the course of next year, driven by a recovery in private consumption, rising foreign demand and a trend reversal in the development of investments.

Global economy loses momentum

In seasonally adjusted terms, global industrial production fell slightly in June compared to the previous month, by 0.1 per cent. Although this means that it is still up 1.5 per cent on the previous year, the trend remains sluggish. For July and August, the Bundesbank's leading indicator also points to stagnation in the global industrial economy. The S&P Global sentiment indicator also points to a further dampener for the recovery in the global industrial economy. In August, the index fell slightly for the third month in a row – from 49.7 to 49.5 points – and thus remains below the growth threshold of 50 points. In the services sector, by contrast, sentiment improved by 0.5 points to 53.8 points in August, with the result that the overall indicator has now risen again to 52.8 points following the decline in July. Overall, the leading indicators suggest that the pace of the global economy is slowing and that global demand, particularly for manufactured goods, will remain subdued in the second half of the year.

In June, the international trade in goods expanded by a seasonally adjusted 0.7% compared with the previous month and was thus roughly back at the level seen at the end of 2022. Compared with the same month of the previous year, it was up 1.8%. As we enter the second half of the year, current reports on container throughput suggest that the modest recovery in global trade will continue: The RWI/ISL Container Throughput Index continued its quite dynamic upward trend in July with a seasonally adjusted increase from 131.2 to 133.2 points. The driving force was container throughput in Chinese ports. By contrast, the increase in the North Range Index stalled. The latest purchasing managers' indices suggest that global export orders have recently declined, which suggests that the momentum of global trade is slowing. Impulses from foreign trade are therefore also likely to be rather low in the second half of the year.

Foreign trade fails to gain momentum in July

Germany's foreign business is marking time. Following the previous significant losses, nominal exports of goods and services in July almost stagnated compared to the previous month, after seasonal and calendar adjustments (-0.1 %). At the beginning of the third quarter, exports were down -2.7 % on the previous quarter; in the less volatile three-month comparison, the minus was also significant at -1.9 %. By contrast, imports of goods and services expanded strongly compared with the previous month, rising by 2.8 %. This was mainly due to a significant increase in imports of goods from the euro area (+8.3 %), from China, Germany's most important supplier country (+6.6 %), and from the USA (+5.3 %). The monthly trade surplus decreased by EUR 3.6 billion to EUR 9.4 billion in July as a result of stronger momentum in imports than in exports.

In seasonally adjusted terms, import prices fell again slightly in July, by 0.3% compared to the previous month, due in particular to lower prices for imported energy and raw materials. At the same time, export prices stagnated (0.0%), meaning that the price ratio of exported to imported goods improved by 0.2% compared to the previous month. In real terms, imports are likely to have risen even more sharply.

The leading indicators are currently sending mixed, but mostly cautious signals for the further development of foreign trade. Incoming orders from abroad increased in July by a seasonally adjusted 5.1 % compared to the previous month, after already rising by 1.4 % in June. Excluding major orders, foreign orders rose by +3.3 %. However, in the less volatile three-month comparison, orders from abroad remained negative at -0.9 %. The ifo export expectations deteriorated for the third time in a row in August, to -4.8 points. Key export industries such as the automotive and mechanical engineering sectors continue to expect foreign demand to decline overall over the next three months. According to a recent survey by the Federation of German Wholesale, Foreign Trade and Services (BGA), German exporters also expect business to shrink in 2024.

In view of the persistently weak global industrial economy and disappointing reports on purchasing managers' indices in key sales markets, no significant impetus is expected for the German export industry in the coming months either.

Production gets off to a weak start in the third quarter

According to the Federal Statistical Office, production in the manufacturing industry was scaled back by 2.4 % in July compared with the previous month, after adjustment for price, calendar and seasonal effects. According to the revised data, output in June had still increased by 1.7 %. Industrial production fell by 3.2 %, while energy production decreased by 1.9 %; output in the construction industry rose slightly by +0.3 %.

Within industry, the month-on-month comparison is mostly negative: significant declines in production were reported in important areas such as the manufacture of motor vehicles and motor vehicle parts (-8.1%), mechanical engineering (-0.5%), metal products (-3.8%) and chemical products (-1.3%). The only sectors to increase their output were food and animal feed production (+3.5%), printed products, sound and data carriers (+1.8%), clothing (+9.4%) and the repair and installation of machinery (+5.6%).

In the more meaningful three-month comparison, output in the production sector fell by 2.7 %. The decline was 2.9 % in industry and 3.4 % in construction. The energy sector was the only one to record an increase of 0.9 %.

By contrast, the order situation in the manufacturing industry appears to be stabilising. In July, orders increased by 2.9% compared to the previous month, after rising by 4.6% in June. At the beginning of the third quarter, the upward trend was mainly driven by foreign business. While incoming orders from abroad rose by 5.1%, domestic demand stagnated (0.0%) after a surge in orders in the previous month (+9.4%). However, excluding the strongly fluctuating large orders, order activity fell slightly by 0.4% compared with the previous month.

Developments varied across the individual economic sectors of the manufacturing industry: While the pharmaceutical products (-6.4%), chemical (-0.8%) and mechanical engineering (-6.1%) sectors saw a decline in incoming orders, the other vehicle construction sector (+86.5%), which is strongly influenced by major orders, the motor vehicle and motor vehicle parts sector (+1.6%) and the electrical equipment manufacturers (+18.6%) sector recorded a significant increase in orders compared to the previous month.

Nevertheless, industrial activity remains subdued at the current margin. In addition to the production data, important sentiment indicators in the manufacturing sector have also deteriorated further recently. Despite a slight recovery in July, incoming orders remain at a low level. The latest indicators for the global economy also suggest that foreign demand will remain weak in the coming months. As a result, a noticeable recovery in export-oriented industry in Germany is not expected in the short term.

Consumer sentiment is deteriorating again

Due to the still incomplete economic statistics in the trade and services sectors, no information is currently available for the latest retail sales. The last data is for April 2024. The Federal Statistical Office has announced that it will publish the seasonally adjusted retail sales figures in September. New car registrations rose by 5.6% overall in August, although they were well below the level of the same month last year, at 27.8%. It should be noted that new registrations rose sharply in August due to the expiry of subsidies for the purchase of commercially used electric vehicles (environmental bonus) at the end of August 2023. In the more meaningful three-month comparison, registrations in August increased by 1.9 %. In August, new car registrations by private individuals fell slightly by 0.7 % compared to the previous month. After high fluctuations in the previous months, the three-month comparison shows an increase of 3.3 %. New car registrations by companies and self-employed professionals rose by 8.8 per cent in August. Over the three-month period, there was a 1.2 per cent increase.

According to the HDE consumer barometer and the GfK consumer climate, the mood among private households in Germany has recently deteriorated again. The HDE consumer barometer fell further in September after temporarily stagnating in August. A decline is also forecast for the GfK consumer climate in September, after a recovery had been observed previously. The main reasons for the latest development were setbacks in income and economic expectations.

Although the ifo business climate index for retail trade including motor vehicles rose by 2.3 points in August, at -23.1 points it remained well in negative territory. Assessments of the current situation improved by 0.5 points to -15.8 points. Expectations rose by 3.9 points to -30.2 points. Both sub-indicators had previously fallen in June and July.

Overall, the leading indicators currently offer little hope of a noticeable increase in consumer spending in Germany. The European Football Championship does not appear to have provided any tangible impetus for consumption, and even noticeable real wage increases are apparently unable to lift consumer sentiment in the face of increased concerns about jobs.

Inflation rate below 2 per cent again for the first time since March 2022

The inflation rate (increase in prices within a one-year period) fell to +1.9% in August, after having reached +2.3% in July. The core rate (excluding energy and food) also fell slightly to +2.8% in August.

Year on year, the price pressure from food has recently increased slightly. Prices in this area were 1.5% higher, compared to +1.3% in July. At the same time, however, the price-dampening effect of cheaper energy intensified again, which was largely responsible for the significant decline in the inflation rate in August. At -5.1% year-on-year, energy prices fell much more sharply in August than in July, when they were down -1.7%. In the services sector, inflation remained unchanged at +3.9% and thus continued to be above average.

Although prices at the upstream economic levels have been trending slightly higher again since the spring in a month-on-month comparison, overall they continue to have a dampening effect on the inflation rate: producer prices rose slightly by 0.2% in July compared to June. However, they fell by 0.8% year-on-year. The main reason for this was a continued decline in energy prices. In July, import prices fell by 0.4 % compared to the previous month and were thus 0.9 % above their level in the previous year. Wholesale selling prices fell by 0.8 % in July compared to the previous month and by -1.1 % compared to the previous year.

Natural gas prices on the spot markets have remained fairly moderate in recent weeks, although the TTF Base Load is currently around 8% above the previous year's level at around €37/MWh. It fell by almost 2% compared to the previous month. Market expectations indicate that natural gas prices will also hover around €40/MWh in the quarters to come. The price of crude oil fell by almost 14% compared to the previous month and most recently stood at €70.6/barrel. Compared to the previous year, the price of crude oil fell by 22%.

Inflation is likely to remain moderate for the rest of the year as a result of lower price increases at the earlier stages of the economic process, moderate energy exchange prices, the effect of the ECB's monetary tightening, appropriate wage settlements and the normalisation of corporate profit margins. In their autumn forecasts, the economic research institutes expect inflation rates of 2.2 to 2.4% for this year and 2.0 to 2.4% for next year.

Economic weakness increasingly reflected in the labour market

The weak economy is causing unemployment to continue to rise and is increasingly slowing the growth in employment: seasonally adjusted registered unemployment rose only slightly in August by 2,000 people, but underemployment increased noticeably by +8,000 people. Cyclical short-time work rose to 232,000 people in June, and the number of notifications of short-time work to the Federal Employment Agency increased by a further 5,000 in July compared with the previous month. Although the number of people in employment continued to rise in July compared with the same month last year, the seasonally adjusted increase of +4,000 people compared with the previous month was significantly lower than in recent months. For the first time since April 2020, the number of people in jobs subject to social security contributions showed a negative rate of change of -9,000 in June compared with the previous months.

The leading indicators do not suggest that a turnaround is imminent: the IAB labour market barometer indicates only a slightly positive labour market outlook for August, although the unemployment component remains in negative territory. The number of jobs registered with the Federal Employment Agency continues to decline. According to the ifo employment barometer, the willingness of companies to hire new staff fell for the third month in a row in August, especially in industry. It is therefore unlikely that the labour market will pick up in the second half of the year.

Corporate insolvencies are falling, but a renewed increase is expected

According to final results, the number of corporate insolvencies in June fell by 14.5% compared to May. Compared to the same month of the previous year, the increase was 6.8%. At 1,653 cases, the figure is close to the pre-corona average for 2016-2019 (1,660). In the first six months of 2024, corporate insolvencies were 24.9% higher than in the same period of the previous year. A number of developments are seen as the causes of the continued dynamic insolvency situation, including the still subdued economic development and catch-up effects from the period of previous years characterised by special regulations and historically low insolvency figures.

The IWH insolvency trend for August, at 1,282 insolvencies, shows an 8.8% decline compared to the previous month (+27.3% compared to the same month last year), after a sharp increase was recorded in July. Based on leading indicators, the IWH expects insolvency figures to rise again in September and October – and to remain consistently above the pre-corona level.