1 The German economy was still listless at the end of the year
The German economy remained listless in the fourth quarter of 2024. Based on an initial and very early estimate released by the Federal Statistical Office, real GDP declined by 0.1% in seasonally adjusted terms 1 . 2 Industry is again likely to have remained particularly weak, being under high pressure to adapt to changing structural conditions. 3 Foreign orders remained very sluggish despite some degree of recovery. The ifo Institute’s business climate index deteriorated again. The construction sector is unlikely to have provided much growth stimulus. A more favourable development in civil engineering is still being offset by the decline in building construction. By contrast, private consumption and the related services sectors are likely to have provided positive impetus. The steep rise in wages provided scope for additional consumer spending. However, consumers remained unsettled and this prevented a stronger recovery in consumption. 4 It is also unlikely that the German economy will manage to escape the prolonged period of stagnation in the first quarter of 2025.
Economic output in Germany declined in 2024 as a whole. According to preliminary calculations by the Federal Statistical Office, real GDP fell by 0.2% on the previous year (and also by 0.2% after calendar adjustment). High financing costs, heightened economic policy uncertainty and the severe capacity underutilisation weighed on investment. The reduced competitiveness of German industry and high competitive pressure, especially from China, were reflected in dwindling exports. Households held back on spending despite sharply rising wages. As a result, their saving rate rose while private consumption increased only slightly.
2 Industrial activity remained weak
Industrial output probably continued to head downwards in the fourth quarter. In November, it rose on the month in seasonally adjusted terms, but averaged over October and November it was down somewhat compared with the previous quarter. The production of consumer goods, in particular, declined. By contrast, capital goods production edged up somewhat, despite a significant decline in the production of passenger cars in these two months. This figure is also likely to have dropped in the fourth quarter overall as data from the German Association of the Automotive Industry (VDA) show that the number of cars produced fell sharply in December as well.
The underlying trend dynamics of demand for German industrial goods stabilised somewhat. In November 2024, new orders in German industry were sharply down on the previous month in seasonally adjusted terms owing to a decline in large orders. Averaged across October and November, there was also a marked decrease compared with the previous quarter. Excluding large orders, however, there was a certain increase in orders both from Germany and abroad compared with the previous quarter. This meant that new orders from abroad continued the trend of recovery seen in the previous two quarters. However, this is unlikely to be enough to boost industrial activity perceptibly. ifo Institute industry surveys point to further weakness. Short-term production plans and export expectations have deteriorated recently, for example.
3 Divergent developments continued in construction
Construction output increased recently. After seasonal adjustment, it was up significantly on the month in November, and averaged over October and November it was likewise somewhat higher than in the previous quarter. The increase was driven by finishing trades and civil engineering. By contrast, the decline in building construction continued. Building construction and civil engineering have developed differently since the beginning of 2022. Building construction has been on a marked downward trajectory since then owing to higher financing costs and construction prices as well as the strong income losses for households. Civil engineering, meanwhile, remained broadly stable. Construction activity is likely to have been largely supported by investment in infrastructure. These differing developments look set to continue. In October, new orders in building construction remained considerably below the level at the end of 2021, whereas in civil engineering they were up significantly as compared with end-2021. The still high demand for infrastructure measures is likely to have been a factor here. Despite the recent increase in construction output overall, the situation in the construction industry remains difficult. According to surveys conducted by the ifo Institute, 39% of firms in the main construction sector were affected by a lack of orders in the fourth quarter. Compared with the previous quarter, the share has consequently actually edged slightly higher.
4 Labour market fairly stable
Total employment recently developed more favourably than expected in the December Forecast for Germany, despite job losses in the manufacturing sector. 5 Following the notable decline in the summer months, the Federal Statistical Office reported a slight seasonally adjusted increase in employment for both October (+12,000 persons) and November (+23,000 persons) in its estimate. This is due, in particular, to the slight improvement in developments in employment subject to social security contributions. The decline in the manufacturing sector actually intensified further. However, this was more than offset by an increase especially in healthcare and social services, business-related services (excluding temporary agency work) and transport and logistics. Short-time work also continues to be used almost exclusively in the manufacturing sector. 6 Developments in the total number of employees in Germany is also being dampened by a significant fall in low-paid part-time employment of late and a declining trend in self-employment.
However, the comparatively pleasing employment developments over the past two months are not an indication of a positive trend reversal in the future. Signals from leading indicators deteriorated further. The ifo employment barometer, which provides information about planned staffing levels in trade and industry over the next three months and was already deep in negative territory, declined further in December. However, this may also be because firms are taking a “wait-and-see” approach before the snap Bundestag elections. The IAB employment barometer, which covers the entire economy, also went down further, but this indicator remains in slightly positive territory. This is in line with stable or slightly rising employment. The inflow of new vacant positions reported to the Federal Employment Agency remained weak. At the same time, the number of vacancies is still comparatively high, and vacant positions often take a long time to fill.
Unemployment rose only minimally in December. After seasonal adjustment, around 2.87 million people were registered as unemployed, 9,000 more than in November. The unemployment rate held steady at 6.1% due to rounding. The outflow rate from unemployment into employment is very low. Due to the structural shifts, it is currently difficult for unemployed persons to find employment in their old profession or in the same sector. Registered unemployment could rise more significantly again in the coming months. The IAB unemployment barometer has fallen further into negative territory, which is an indication of rising unemployment.
5 Energy commodity prices up slightly of late
Energy commodity prices picked up somewhat recently. Prices of crude oil, in particular, rose markedly. As this report went to press, a barrel of Brent crude oil cost US$83, around 10% more than as recently as November. This was mainly due to new US sanctions targeting the Russian oil sector, which are likely to disrupt deliveries of Russian oil. Gas prices also picked up somewhat after the expiry of the transit agreement between Russia and Ukraine, meaning that Russia can no longer export gas via Ukraine. In addition, prices were propped up by unfavourable weather conditions which were accompanied by higher demand for gas.
6 Inflation rate increased to 2.8%
Price developments at the upstream stages of the economy were uneven. Import prices were recently up very significantly compared with the previous month. This was the case for both energy and other goods. By contrast, price developments in industrial domestic sales were fairly subdued both in aggregate terms and in the sub-components. For the first time in around one and a half years, prices were once again clearly up on the year. They were just over ½% higher for imports and up around ¾% for domestic industrial sales.
The inflation rate was significantly higher again in December, partly due to a base effect. The Harmonised Index of Consumer Prices (HICP) rose by 0.3% on the month in seasonally adjusted terms, after prices had fallen slightly in the previous month. 7 Energy prices remained virtually unchanged on the previous month, and food prices also rose only slightly. Services became markedly more expensive again, however. In addition, prices for non-energy industrial goods picked up strongly, following rather subdued price developments in the preceding months. Looking at the year-on-year figure, headline inflation rose significantly from 2.4% to 2.8%. 8 However, this was due in part to relatively low energy prices at the end of 2023. Core inflation excluding energy and food likewise picked up slightly from 3.1% to 3.3%.
Nevertheless, the disinflation process continued in 2024. On average over the past year, the previously still exceptionally high inflation rate dropped significantly. As measured by the HICP, it fell from 6.0% to 2.5%. 9 This was due to falling energy prices, but also to declining inflation in the case of other non-energy industrial goods. By contrast, the inflation rate for services remained far above average, partly owing to steep wage growth.
In early 2025, inflation is likely to remain high initially. This is due to the further increase in the carbon price on fossil fuels as well as higher prices for the “Deutschlandticket” and for private health insurance. 10 The inflation rate is likely to come back down in the coming months. The recent very steep inflation for services will decline markedly, but it will still remain significantly above its longer-term average.
