German economic output probably grew somewhat more slowly in the second quarter than expected. Real gross domestic product (GDP) is likely to have increased only slightly in the second quarter of 2024. Temporary hopes that industrial activity would soon pick up were distinctly dampened when data for May was published. There was a significant fall in industrial production and the signs of stabilisation in new orders sparked by April's strong order growth tailed off markedly. The industrial sector is therefore likely to have slowed economic activity in the second quarter. Higher financing costs continued to weigh on investment and thus on domestic demand for industrial goods and construction work. For this reason – as well as due to a counter-effect following the mild weather in the first quarter – construction output, too, is likely to have fallen in the second quarter. By contrast, the recovery in the services sector probably continued, as indicated, for example, by survey results from the ifo Institute and S&P Global. Private consumption is likely to have buoyed demand for services. Overall, available indicators suggest that private consumption increased slightly in the second quarter. 

Economic activity is likely to strengthen somewhat in the third quarter. Private consumption will probably pick up a little more momentum. This is likely to be supported, in particular, by the favourable framework conditions of strongly rising wages, subsiding inflation and a robust labour market. Furthermore, in spite of the disappointing June results, pessimism among retailers and service providers declined markedly overall in the second quarter according to the ifo Institute's Business Climate Index. This is also true for the manufacturing sector. However, the recent dip in industrial new orders suggests that the spell of weak demand has not yet been fully overcome and that industrial activity is likely to improve only slowly. As things currently stand, GDP growth in the third quarter, too, could therefore fall short of the expectations expressed in the Bundesbank’s June forecast for Germany. 1  

Temporary hopes of an end to the weakness in the industrial sector were not realised, as industrial output declined sharply in May. Compared with the previous month, industrial output declined sharply in seasonally adjusted terms 2 and fell back to the interim low of December 2023. The level of output averaged across April and May was thus also markedly lower than that of the first quarter. This decline was fairly broadly based across sectors, with two major exceptions: manufacturers of motor vehicles and motor vehicle parts, which expanded their production substantially. According to the German Association of the Automotive Industry (VDA), this is likely to have continued in June. In addition, production in energy-intensive sectors was a bright spot. Following a sharp increase at the beginning of the year, it was again slightly higher when averaged over April and May than the average for the previous quarter. Even so, the level of production in energy-intensive industries remained significantly below the levels seen before Russia launched its war of aggression against Ukraine.

Signs of stabilisation in industrial demand that emerged in April have weakened, but are still in place. New orders in Germany's industrial sector declined markedly in May compared with the previous month. Averaged over April and May, they were significantly below the average of the first quarter. Core – i.e. excluding volatile large orders – industrial new orders lost hold of the strong growth they had seen in April. While significantly more orders from the euro area were the main reason for the strong increase in April, the fall-off in May was attributable to considerably fewer orders from non-euro-area countries. Thanks to a strong April, industrial new orders excluding large orders still rose moderately when averaged over April and May compared with the previous quarter. Thus, while the signs of a stabilisation in demand have weakened, they are still in place. Survey data paint a similar picture. Despite a dampening of business sentiment in June, overall pessimism declined markedly in the second quarter compared with the previous quarter. This applies, in particular, to business expectations as surveyed by the ifo Institute, but also to ifo data on production plans and export expectations. 

The upturn in the services sector is likely to have continued and was probably increasingly buoyed by private consumption. While production data for the services sector (excluding trade) are currently only available up to March, they are indicative of favourable starting conditions for the second quarter. 3 Furthermore, the sentiment indicators now available for the entire second quarter suggest that service providers continued to ramp up their activity. According to surveys conducted by the ifo Institute, service providers were markedly more satisfied with their business situation than previously. In addition, the corresponding S&P Global Purchasing Managers' Index was consistently above the expansion threshold. Private consumption is likely to have buoyed the expansion of activity by service providers. Real sales in the accommodation and food services sector, which are thus far only available up to April, still point to rather hesitant consumer behaviour in this sector. However, price and seasonally adjusted retail sales in April were significantly higher than the average of the previous quarter. The data on private vehicle registrations already available for the entire second quarter also indicate a slight increase, thanks to a sharp rise in June. According to ifo Institute surveys, retailers, but also enterprises in the accommodation and food services sector, assessed their business situation to have improved in the second quarter compared to the previous three-month period. This could signal that consumers’ precautionary motives are gradually becoming less important and that they were already expanding their consumption expenditure somewhat, given rising real incomes and a robust labour market. This is also indicated by the GfK consumer climate index, which recovered in the second quarter. It shows, for the quarter as a whole, that the economic outlook and, in particular, income expectations improved. However, the propensity to save declined only slightly, and the propensity to purchase also increased only a little.

The weak economy, combined with strong immigration, currently means that both employment and unemployment in Germany are rising slightly. On the one hand, the weak economic stimulus has not yet been sufficient to keep employment in the manufacturing and construction sectors – or in temporary agency work – constant. On the other hand, employment continues to rise in most services sectors. In particular, areas of basic public services such as healthcare and long-term care, education, energy and water supply, and also the public sector, recruited noticeably more staff. Across all sectors, the number of persons in employment increased by 20,000 in May in seasonally adjusted terms. Employment subject to social security contributions also rose by this amount averaged over March and April. 4 On the other hand, the proportion of employees subject to social security contributions who are on short-time work increased further. In April, 0.7 % of them received short-time working benefits, the vast majority of whom were in the manufacturing sector. 

Leading indicators of employment suggest that current developments will continue over the next few months. The ifo Institute's employment barometer remains negative for manufacturing and construction, but has recently stabilised. The employment barometer of the Institute for Employment Research (IAB) for the economy as a whole continues to indicate a slight increase in employment. However, the number of job vacancies reported to the Federal Employment Agency is down significantly. In particular, the reporting of new vacancies is low.

Unemployment in June rose almost as much as in May. In seasonally adjusted terms, 2.78 million persons were registered as unemployed, which was 18,000 more than in May. The unemployment rate went up slightly to 6.0 %. Most recently, unemployment covered by the statutory unemployment insurance scheme, which is sensitive to cyclical conditions, rose in particular. Compared with the previous year, unemployment was up by 172,000 people. However, total underemployment, which also includes persons engaged in labour market policy measures, rose less sharply as the number of persons receiving assistance fell. The IAB’s unemployment barometer recovered somewhat after the significant decline in May, but remains below the neutral threshold. This suggests a somewhat slower rise in unemployment over the next few months. 

Energy commodity prices have risen slightly of late. Crude oil prices, in particular, have picked up somewhat in recent weeks. As this report went to press, a barrel of Brent crude oil cost US$88, just over 6 % more than in May. This is likely to have been mainly due to new production cutbacks by some OPEC countries and their partners, as well as renewed tensions at times in the Middle East. European wholesale natural gas prices also increased marginally. Concerns about Russian gas supplies to Europe and strong Asian demand for liquefied natural gas propped up prices.

At the upstream stages of the economy, the positive price trend for non-energy products continued. For energy, there was a decline in both producer prices in June and import prices in May, the last months for which the respective data are available. However, for non-energy products sold domestically, producer prices recently rose at a similar rate to previous months. This increase was again somewhat sharper than in the preceding month. By contrast, price dynamics for imports excluding energy declined somewhat. Overall, industrial producer prices were just shy of 2 % below their previous year’s level, and import prices were barely below their level of the previous year.

The inflation rate was somewhat lower again in June. The Harmonised Index of Consumer Prices (HICP) rose by only 0.1 % on the month in seasonally adjusted terms, after 0.2 % in May. Lower consumer prices for energy once again had a dampening effect. By contrast, food prices, especially for unprocessed foods, rose significantly. Prices for non-energy industrial goods also edged up slightly once again. By contrast, price dynamics for services declined markedly. 5 Looking at the year-on-year figure, headline inflation fell considerably, from 2.8 % in May to 2.5 % in June. 6 The core rate (HICP excluding energy and food) decreased a little less sharply, from 3.5 % to 3.3 %. It thus remains well above the headline rate.

The inflation rate is likely to fluctuate over the coming months, but is unlikely to show any further downward tendencies. This is partly due to the high volatility in oil prices last year, the impact of which is now leading to a base effect in consumer prices. Services inflation is likely to come down only slowly over the next few months, given the continued strong wage growth.

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