Contrary to expectations, German economic output fell slightly in the second quarter of 2024. According to the flash estimate of the Federal Statistical Office, real gross domestic product (GDP) recorded a quarter-on-quarter decline of 0.1 % on a seasonally adjusted basis. 1 This preliminary figure is highly likely to be revised as key statistics for trade and services, which feed into the GDP estimate, are currently being published with a time lag and are not yet available for the past few months. GDP had grown by 0.2 % in the first quarter. According to the flash estimate, investment in machinery and equipment and in new buildings declined in particular. Construction had been expected to normalise following a rise in activity for weather-related reasons in the first quarter. However, there were other key headwinds besides these that persisted into the second quarter. For example, foreign demand for industrial products remained weak. Higher financing costs and greater economic and political uncertainty acted as a drag on investment. Consumers still appeared to be unsettled, with the effect that the strong increases in wages still failed to feed through into an equally robust upturn in consumer spending.

Industrial production and goods exports resumed their downward trend in the second quarter of 2024, despite evidence of stabilising demand. Industrial production fell again in the second quarter when viewed on a seasonally adjusted basis, thereby continuing a negative trend that had been interrupted only in the first quarter. Production of intermediate and capital goods declined more strongly than that of consumer goods. Among intermediate goods, the manufacture of electrical equipment again saw a particularly strong decline. By contrast, energy-intensive sectors, the vast majority of which are assigned to the category of intermediate goods producers, recorded an increase, just as in the previous quarter. In particular, production in the chemicals industry recorded a further strong increase. Energy-intensive sectors have thereby turned around a downward trend dating back to the start of 2022, which was triggered by what were at times huge increases in energy prices. 2 The weakness of capital goods production was once again driven heavily by developments in mechanical engineering. By contrast, automotive (and automotive parts) manufacturers recorded an increase in production for the first time in more than a year. Given the weakness of production, real goods exports also recorded a significant seasonally adjusted decline in the second quarter. Industrial activity continues to suffer from weak demand as well. While new orders in Germany's industrial sector did increase noticeably as a basic trend – i.e. excluding volatile large orders – they continue to come in at a low level. And according to the ifo Institute, the proportion of businesses suffering from a shortage of orders rose once again in July and now stands at 43.6 %.

Investment in machinery and equipment acted as a distinct drag on economic activity in the second quarter. As was the case in previous quarters, high financing costs and economic policy uncertainties weighed on the investment activity of German enterprises. In addition, the lack of orders in the manufacturing sector is having an increasingly negative effect on the degree of capacity utilisation. According to surveys conducted by the ifo Institute, capacity utilisation in the manufacturing sector declined to just 77.5 % in July, 3 some 6 percentage points below its long-term average. Another indicator of distinctly weaker investment in machinery and equipment can be found in the price-adjusted domestic sales of capital goods producers. On a seasonally adjusted basis, their decrease represented a further acceleration of the decline recorded in the previous quarter, and proved to be broadly based across sectors. According to data available up until May, price-adjusted imports of capital goods stagnated, and were therefore unable to compensate for the decline in domestic sales.

Alongside the decline in construction investment, value added in the construction sector also shrank. Following a slight expansion in the previous quarter, seasonally adjusted construction output fell again somewhat in the second quarter, coming in at a level similar to the final quarter of 2023. This upward and downward movement was largely driven by weather influences. Construction output in the first quarter of the year had benefited from exceptionally mild weather conditions. A corresponding counter-movement in the second quarter is then likely to have contributed to the decline in output, as indicated by the ifo Institute survey on hindrances to construction activity due to weather conditions. The previous divergence in the economic momentum of the building construction and civil engineering sectors did not extend into the second quarter. Both sectors recorded similarly strong declines in production. At the same time, building construction enjoyed a somewhat more favourable development in demand. Based on new orders, it caught up a little to civil engineering. The latter's order intake had merely stagnated in a quarter-on-quarter comparison. Like the industrial sector, construction is also suffering from weak demand. Ongoing high construction and financing costs are making themselves felt here. For example, the average effective interest rate for loans to households for house purchase stood at 4.0 % in June, which was slightly higher than in the previous quarter. Averaged over April and May, the main construction sector as a whole saw a slight increase in order intake compared to the prior quarter. However, new orders remained far below the level recorded in the first quarter of 2022. In residential construction, too, which had previously recorded a particularly strong slump in demand, significantly more orders were received in April and May than in the first quarter. However, according to surveys conducted by the ifo Institute, the proportion of firms in the main construction sector reporting a shortage of orders stood at 38 % in July, only just below the recently recorded peaks. Furthermore, the number of construction permits once again experienced a strong decline in the second quarter as a whole, including in residential construction.

According to the relevant indicators, which are currently available only with a significant time lag, private consumption probably remained subdued despite favourable conditions, whereas service providers may have seen further moderate growth. Key statistics for trade and the services sector are currently available only with significant time lags. The reason for this is a revision of the reporting system. 4 The published sales figures in the retail and wholesale trade and the hotel and restaurant sector currently go no further than April. Where production figures for the services sector are concerned, there are no monthly figures available at all for the second quarter. This makes it much more difficult to evaluate economic developments in the sectors concerned. For this reason, the GDP figure released in the flash estimate for the second quarter of the year is subject to a high likelihood of revision. Nonetheless, it can be said with some confidence that the key props of consumer spending in previous quarters – namely the robust labour market and strong growth in real incomes – continued their supportive role in the second quarter too. Even so, consumers remained uncertain, as indicated by the continued high propensity to save according to the GfK survey. Although income expectations did rise noticeably in the second quarter, the propensity to purchase barely increased as a result. That said, following a significant decline in the previous quarter, there was a slight increase in the number of new private vehicle registrations. This was also facilitated by the slight recovery in new registrations of electric vehicles (from a low level). These had experienced a slump at the turn of the year following the expiry of a subsidy for private owners. Where the retail trade is concerned, the price-adjusted sales figures available up until April at least point to a positive start to the second quarter. By contrast, sales in the hotel and restaurant sector were somewhat below the prior-quarter average in April. All in all, private consumption is likely to have increased slightly, but at the same time probably continued to lag behind growth in real incomes. In the services sector, on the other hand, the moderate upward trend evident in the first quarter looks to have continued, as indicated by the corresponding ifo Institute business climate index and the S&P Global Purchasing Managers’ Index. Furthermore, production in the services sector benefited from a favourable starting position in the second quarter, as its level in March had been significantly higher than the average for the first quarter as a whole.

The labour market remained relatively stable despite the sluggish economic recovery. Employment rose moderately in the second quarter of 2024. However, the rise was not powerful enough to fully absorb the migration-driven growth of the labour force. Accordingly, the number of unemployed also rose slightly. The persistent weakness of the economy was also reflected in a moderate increase in short-time work and a gradual decline in the number of vacancies. Little is likely to change in this respect in the short term.

Germany’s working population increased slightly in the second quarter. On average, the seasonally adjusted number of employed persons was up by 54,000 compared with the first quarter of 2024, an increase of 0.1 %. 5 The declining trend in self-employment – which has persisted for some time now – continued, and there was barely any change in purely low-paid part-time employment. Job growth was primarily attributable to jobs subject to social security contributions.

At the same time, the two-speed developments across sectors evident in previous quarters continued. As a result of demographic change and the transformation of energy supply, it is above all the areas of basic public services that have benefited from increased demand for employees subject to social security contributions. These include health and social services, the public sector, the education sector, and energy and water supply. The level of employment was likewise higher than in the first quarter in a number of other services sectors, particularly accommodation and food services 6 along with qualified business services.

The weakness of the economy, which dates back more than two years now, is having an impact on demand for labour, above all in the manufacturing and construction sectors. To start with, the core workforces were largely retained, with any adjustments effected through the reduced use of temporary agency work. But for the last year or so, the number of employed persons subject to social security contributions has also been declining in both these sectors of the economy. That said, the decline has been moderate as, even within manufacturing, a number of sectors are doing well and building up headcount. Disaggregated sectoral data is only available up until the end of 2023. This shows that headcount increased substantially over the course of 2023 by between 2½% and 5 % in the manufacture of data processing equipment and electronics, other transport equipment, the repair and installation of machinery, and pharmaceutical goods. In addition, there was a notable increase in employment in mechanical engineering. By contrast, energy-intensive sectors of the economy experienced job losses to a certain degree. Furthermore, employment declined noticeably last year in the manufacture of metal products, rubber and plastic goods, as well as in a number of consumer-related industries. This is likely to be down to structural as well as economic reasons. In the manufacturing sector in particular, short-time work is additionally being used as an adjustment instrument to bridge periods of weak demand. In April, 2.8 % of all manufacturing employees subject to social security contributions were affected by this phenomenon. Short-time work was virtually non-existent in the rest of the economy.

Registered unemployment once again increased slightly. In the second quarter, an average of 2.76 million persons were unemployed when viewed on a seasonally adjusted basis, or around 46,000 persons more than in the first quarter of 2024. The unemployment rate remained unchanged at 5.9 %, partly because of an increase in the number of people in work. In July, the ranks of the unemployed were swelled by a further 18,000 people compared to the previous month, taking the unemployment rate to 6.0 %. The increase of recent months is primarily attributable to more people covered by the statutory unemployment insurance scheme, which is influenced by cyclical factors. By contrast, refugees from Ukraine – most of whom would receive the basic welfare allowance – made virtually no contribution to the rise in unemployment. Here there has been progress in labour market integration, with the number of people moving into employment having improved noticeably in recent months.

According to the leading indicators, the next few months are unlikely to dispel the sluggishness of labour market developments. The IAB employment barometer for the overall economy remains in slightly positive territory. This points to a slight increase in employment in keeping with developments over recent months. Although the recruitment plans of trade and industry for the next three months – as ascertained by the ifo Institute in its surveys – have shown signs of bottoming out for some months now, they remain slightly in the negative zone. Both apply to the manufacturing sector in particular. In trade, the negative trend development of the corresponding leading indicator has yet to be broken. By contrast, service providers (excluding trade) are intending to increase headcount slightly overall. The number of vacant positions reported to the Federal Employment Agency continues to decline. In particular, growth in newly posted job offers is extremely weak. As firms have largely refrained from letting staff go during the prolonged phase of economic weakness, the need to recruit is not great. Although the aggregate job supply as gleaned by the IAB through company surveys has likewise declined over the last few quarters, it remains at an extremely high level in a historical comparison. Just like the significant amount of time it takes for vacant positions to be filled, this points to persistent difficulties in recruitment, as well as relatively tight conditions in at least some labour sub-markets for certain specialist personnel. Where the number of unemployed is concerned, the increase may at least slow down. The IAB unemployment barometer has recovered somewhat recently but remains just in negative territory.

Negotiated rates of pay rose significantly in the second quarter of 2024 as well. Negotiated rates of pay, including ancillary agreements, recorded a year-on-year increase of 3.1 % in the second quarter, following on from a previous rise of 6.2 %. This was above all driven by the effects of high tax and social contribution-free inflation compensation bonuses from the previous year, which significantly increased the rate in the first quarter and dampened it strongly in the second quarter. 7 If these special payments are stripped out of calculations, negotiated rates of pay recorded a year-on-year increase of 4.2 % in the second quarter, significantly more than in the first quarter (3.0 %). Permanent wage increases are becoming increasingly significant.

Actual earnings likewise increased strongly. This is indicated by the steep increase in gross monthly earnings apparent in the earnings survey of the Federal Statistical Office, the figures for which are available up to and including June 2024. 8 The high actual earnings growth by long-term standards is continuing.

High wage increases were also agreed in the latest round of collective wage agreements. The wage increase in annualised terms in almost all sectors that concluded a new collective wage agreement in the second quarter amounted to between 4 % and 6 %. 9 The chemicals industry (along with private banks) was at the lower end of the range, and the main construction sector was at the upper end. It should be stressed that the most recent settlements in these three sectors, which are high in a longer-term comparison, comprise exclusively permanent wage increases and no longer include inflation compensation bonuses. In retail as well as wholesale and foreign trade, hefty wage increases were agreed following negotiations that were drawn out over the best part of a year (5.0 % and 4.8 % per annum respectively). However, the agreed inflation compensation bonuses and backpayments of retroactive wage increases will only be paid out in the third quarter, when they will then contribute to a high aggregate growth rate for negotiated rates of pay.

High wage settlements are likely in impending negotiations too. Union wage demands remain high and currently lie between 7 % and 19 % for a period of twelve months. The demands of the trade union IG Metall for the metals and electrical industry are at the lower end of the spectrum in the current round of collective wage negotiations, whereas those in system catering are at the upper end. Wage demands are particularly striking in the services sector at present. 10 Over the last three years, real wage losses have accumulated in both the manufacturing and services sectors. For this reason, unions are looking for lasting real wage compensation. Given that inflation compensation bonuses are only tax and social contribution-free up until the end of 2024, the unions are now switching their focus to permanent wage increases. With the willingness to strike having been pronounced up until now and labour shortages still a widespread phenomenon, there is good reason to believe that wage increases will remain comparatively high going forward.

Price inflation did not record a further quarter-on-quarter decline in the second quarter of 2024. On a seasonally adjusted basis, consumer prices (HICP) rose markedly quarter on quarter in the second quarter, just as they had in the first quarter, with the latest rise amounting to 0.8 %. The main driver of this increase was the continued strong rise in the price of services. The prices of certain services, such as social services and insurance, were probably adjusted after a certain time lag in line with cost increases that built up over a prolonged period of time. Rents were also raised in excess of the long-term average again. Food prices increased at a similar rate to recent quarters, i.e. only moderately overall. In the case of non-energy industrial goods, by contrast, price inflation fizzled out. This also applies if clothing and footwear – the prices of which typically fluctuate strongly – are excluded from calculations. This was offset by the fact that energy prices once again rose markedly. Over the previous two quarters, by contrast, the cost of energy had declined. For one thing, oil prices picked up again, with the impact of this rise being exacerbated somewhat by the depreciation of the euro. For another, the temporary cut in the rate of VAT for gas and district heating expired in April.

The disinflation process slowed further in a year-on-year analysis. Headline inflation declined only slightly, from 2.7 % in the first quarter to 2.6 % in the second quarter. 11 The core rate excluding energy and food also declined only slightly, from 3.4 % to 3.2 %. However, this fall was slowed by a base effect: the rate for May 2024 no longer included the dampening effect on the prior-year rate as a result of the introduction of the “Deutschlandticket” in May 2023.

In July the annual inflation rate actually increased slightly, while the core rate remained unchanged. The latter held steady at 3.3 %. By contrast, the headline inflation rate increased slightly from 2.5 % to 2.6 %. 12 Compared to the previous month, consumer prices rose moderately in July on a seasonally adjusted basis. Although energy prices rose, the increase was less than might have been expected given the distinct increase in crude oil prices. This may have been attributable to a compression of the profit margins on refined petroleum products. Prices for non-energy industrial goods and food likewise only went up to the usual extent. By contrast, services recorded another above average price increase.

From today’s perspective, inflation rates are expected to temporarily return to slightly higher levels towards the end of the year. The previous negative inflation rates for energy will then flip into positive territory. This is mainly explained by the decline in energy prices in the final quarter of 2023. However, the currently depressed profit margins for refined petroleum products could also gradually creep up again. Core inflation can likewise be expected to remain at an elevated level given the persistently strong pressure on wages.

Economic output could increase slightly in the third quarter of 2024. Just like activity in the services sector, consumer spending can be expected to rise. While it is true that consumer restraint appears to be more ingrained than had been assumed in the forecast for Germany from June 2024, 13 and the saving rate is still likely to go up in the third quarter, the favourable parameters established by significant price-adjusted increases in disposable incomes should increasingly feed through into rising household expenditure. By contrast, the weakness in industry – as well as in construction – is likely to persist. Given the most recent deterioration in the outlook for global industrial activity, foreign demand could remain weak. Moreover, industrial firms are operating in a difficult competitive environment. Against this backdrop, both exports and investment in machinery and equipment are also expected to fall short of the expectations set out in the last forecast for Germany. All in all, economic output will probably expand only slightly. This will delay the anticipated gradual strengthening of the economy even further. On the other hand, the prospect of a recession – i.e. a sharp, broad-based and persistent decline in economic output – looks unlikely from the current standpoint, as long as no new negative shocks occur.

Consumer spending and the services sector should provide some support to the economy. Households' increasing scope for spending should translate into higher consumer spending, if only hesitantly. The GfK’s consumer climate index for July was above the average of the prior quarter, thereby continuing its upward trend of recent months. Most notably, income expectations have once again risen significantly. The propensity to buy likewise increased – albeit from a low level. In a mirror development, the propensity to save has declined slightly (from a high level) against the prior-quarter average. However, consumer uncertainty is likely to continue to dampen any uptick in household spending. Economic and political uncertainty is high and rose further at the start of the third quarter. 14 This may partly explain why vehicle registrations declined significantly in July compared to the average of the second quarter, according to the German Association of the Automotive Industry. At the same time, the surveys of the ifo Institute pointed to a deterioration in the business situation and business expectations of retailers. By contrast, there has at least been something of an improvement in the business situation of the hotel and restaurant sector. Overall, therefore, consumer spending is likely to increase only slightly in the third quarter of the year. The services sector could likewise record moderate growth in the third quarter. According to the ifo Institute, the business situation of service providers in July remained more or less at the improved level of the previous quarter, while the corresponding Purchasing Managers’ Index of S&P Global remained above the growth threshold.

By contrast, industry is likely to be the main drag on economic activity for the time being. According to ifo Institute surveys, the business situation and the expectations of firms in the manufacturing sector deteriorated relatively sharply in July. At the start of the third quarter, short-term export expectations and production plans were also lower than in the previous quarter, thereby pointing to a continuation of the current spell of weakness in industry. On the other hand, order intake in industry provided a glimmer of hope: this rose significantly in June following five successive months of decline. If volatile large orders are excluded, there was even a quarter-on-quarter increase after two years of negative growth rates. Energy-intensive industry is also seeing positive developments. For example, manufacturers of chemical products recorded a fourth consecutive quarter-on-quarter increase in their order intake. Overall, however, Germany’s industrial sector can be expected to remain weak in the third quarter, too.

Baker, S., N. Bloom and S. Davies (2016), Measuring Economic Policy Uncertainty, The Quarterly Journal of Economics, Vol. 131, Issue 4, pp. 1593–1636.

Deutsche Bundesbank (2024), Forecast for Germany: German economy slowly regaining its footing ‒ outlook up to 2026, Monthly Report, June 2024.

Federal Statistical Office (2024a), Gross domestic product in the 2nd quarter of 2024 down 0.1% on the previous quarter, press release no 289 of 30 July 2024.

Federal Statistical Office (2024b), Verschiebung der monatlichen Statistiken im Handel und im Dienstleistungsbereich.

Federal Statistical Office (2024c), Employment slightly up in June 2024, press release no 293 of 31 July 2024.