Commentary: Economic conditions

1 Germany’s economic recovery is continuing

The economic recovery in Germany is continuing. Real GDP

is expected to rise again slightly in the second quarter. While the German economy still faces headwinds, more bright spots are emerging. Industrial output increased in April, for example, and new orders are gradually stabilising. Foreign demand, in particular, shows signs of improvement – albeit starting from a low level. Higher financing costs continue to dampen domestic demand, particularly investment activity. This is largely putting a burden on housing construction. Construction output fell back down significantly in April, having been boosted by exceptionally mild weather in the first quarter. By contrast, the rebound in the services sector looks set to continue, as indicated by the results of S

P Global’s survey of purchasing managers. Moreover, the upturn in the services sector could be increasingly supported by private consumption. While private consumption was still subdued in the first quarter, it is likely to go up somewhat in the second quarter. Consumers were still holding back on additional spending at the beginning of the second quarter but their spending leeway is currently improving, mainly thanks to a steep rise in wages. And consumer sentiment has brightened significantly of late. Survey indicators also indicate a recovery in overall economic activity. According to the

ifo

Institute’s business climate index, taking the average of April and May, the business situation was significantly better than in the first quarter, while business expectations for the next six months improved markedly.

For further information on the outlook for the German economy, see Deutsche Bundesbank (2024).

2 Industry is slowly working its way past its bout of weakness

Industry is slowly making progress in working past its bout of weakness. Industrial output has been on a generally upward trajectory since the start of the year. After seasonal adjustment,

Seasonal adjustment here and in the remainder of this text also includes adjustment for calendar variations, provided they can be verified and quantified.

it increased slightly in April as well and was somewhat higher than in the first quarter. Output growth was not broad-based, however, but was mainly driven by the automotive industry.

Excluding the manufacture of motor vehicles and motor vehicle parts, industrial output declined.

Output in energy-intensive sectors, which had increased since the beginning of the year, was also slightly up on the quarter in April, despite edging back down month on month. The short-term outlook is still subdued overall. According to data from the German Association of the Automotive Industry, the number of passenger cars manufactured went down fairly significantly again in May. Demand for industrial products remains weak generally, but there are increasing signs of improvement. Though there have been few large orders of late, industrial new orders excluding volatile large orders rose significantly in April – on both the month and the quarter. Although the automotive industry was also a key pillar here, the increase in new orders is likely to have been more broad-based than that of industrial output.

The underlying trend for industrial demand improved due to demand from abroad, especially. Investment and consumer goods, in particular, attracted increased demand from euro area countries. In addition, real exports of goods in April were up on the month and also higher than in the first quarter of 2024. Overall, this corroborates the signals observed in previous months that there would be a gradual increase in demand – especially from abroad. A further improvement would also be consistent with ifo

business and export expectations in the manufacturing sector, which have been brightening since the turn of the year.

3 Private consumption is expected to pick up somewhat

Private consumption is expected to pick up somewhat in the current quarter. Consumers remained reluctant to spend in some respects. Averaged across April and May, motor vehicle registrations by private owners were down on the first quarter, according to data provided by the German Association of the Automotive Industry.

The registration figures for new electric vehicles, in particular, have been very low since the sharp decline at the turn of the year. The end of the environmental bonus for private electric vehicles led to anticipatory effects in December 2023 and a sharp drop in the number of electric car registrations in January.

Price-adjusted sales in the hotel and restaurant sector in April were likewise slightly down on the previous quarter’s level. However, there were signs of an upturn in the retail sector, where price and seasonally adjusted sales in April were up significantly on the previous quarter’s level. The private consumption survey indicators available for the second quarter also indicate a gradual improvement. The GfK consumer climate index continued its recovery in April and May. In May, in particular, consumers’ economic prospects improved significantly on the back of a moderate rise in their income expectations and a marked decline in their propensity to save. However, their propensity to purchase barely improved. The

ifo

business climate index for enterprises in consumer-related services sectors continued to grow in April and May from a low level. Assessments of the current situation and expectations for the next six months improved in the retail sector. Overall, therefore, the indicators suggest a positive trend in private consumption over the remainder of the second quarter.

4 Labour market largely unchanged

There was little change in the labour market during the period under review. Employment expanded at a low rate. Seasonally adjusted figures show that, in April, 25,000 more people were in employment than a month earlier. In March, total employment had grown by only a very small amount. According to the Federal Employment Agency’s first extrapolation, this was due to the weak growth of employment subject to social security contributions, which largely stagnated. Weak cyclical demand for labour was particularly evident in temporary agency employment, but also in the manufacturing and construction sectors, and jobs were cut. Looking at the economy as a whole, this was offset by additional jobs in some services sectors, most notably in healthcare and long-term care. That not more jobs were lost in the manufacturing sector was due to the continued moderate rise in short-time work. In March, almost 220,000 employees subject to social security contributions were on short-time work for economic reasons, the vast majority of them in the manufacturing sector according to the sectoral breakdown, which is available up to February.

This situation is unlikely to change much over the next few months. As employment remained surprisingly strong over the past two years of economic weakness, the need to recruit new staff should not initially be particularly pronounced in the event of a cyclical recovery. This is also suggested by the leading indicators of employment developments. During the period under review, they were barely changed in neutral territory. There was some recovery in the average hours worked by employed persons in the first quarter of 2024. But cyclical reasons were less of a factor here than the clear reduction in the sickness rate, which had been enormously high in the fourth quarter of 2023.

Unemployment continued to rise perceptibly in May. As at the cut-off date, the Federal Employment Agency recorded around 25,000 more persons as unemployed than in April, giving a seasonally adjusted total of 2.76 million persons. The unemployment rate held steady at 5.9 %.

Despite the higher number of unemployed, the unemployment rate did not rise as the number of active workers also increased – partly owing to high immigration. The Federal Employment Agency adjusts this figure, which is used to calculate the unemployment rate, only once a year – usually in May – and in doing so catches up on the developments of the past 12 months.

Unemployment was up by 179,000 persons on the year. Meanwhile, total underemployment, which includes persons in labour market policy measures, only increased by around 134,000. This means that around one-quarter of the increase in unemployment over the past 12 months can be explained by the decline in the number of participants in labour market policy measures as well as language and integration courses. The expectation that had emerged in recent months that rising unemployment would end soon suffered a setback with the latest

IAB

barometer. The barometer fell further into negative territory again in May.

5 Energy prices mixed of late

Energy price developments were mixed in the reporting period. Crude oil prices declined somewhat in trend terms in recent weeks. As this report went to press, a barrel of Brent crude oil cost US$85, just over 5 % less than in April. This was likely due mainly to somewhat reduced tensions in the Middle East of late and the decision by OPEC

and its partners to reverse some of their previous production cuts in the future. At the same time, European gas prices rose markedly. A number of unexpected maintenance-related production outages, concerns about Russian gas supplies to Europe and strong Asian demand for liquefied gas drove prices up.

6 Inflation rate up again in May

At the upstream stages of the economy, prices excluding energy rose again slightly in the reporting period. Domestic producer prices for energy remained more or less constant in April compared with the previous month. However, import prices for energy rose significantly again, in line with commodity prices, which had risen in the meantime. The recently very weak price dynamics at the upstream stages of the economy therefore appear to be slowly picking back up somewhat, especially in imports. Nevertheless, prices at the upstream stages of the economy were still lower than in the previous year, by just over 3 % for industrial products and by slightly less than 2 % for imports.

A base effect meant the inflation rate increased markedly in May. By contrast, consumer price dynamics slowed somewhat in month-on-month terms. The Harmonised Index of Consumer Prices (HICP

)

rose by 0.2 % on the month in seasonally adjusted terms, after +0.4 % in April. Declining prices for energy, processed food and non-energy industrial goods had a dampening effect. By comparison, the dynamics of unprocessed food and services prices were extremely strong. In terms of services, sharply higher prices for package holidays had a particularly pronounced impact. Looking at the year-on-year figure, inflation picked up again, from 2.4 % in April to 2.8 % in May. Much of this increase is attributable to a base effect in local public transport. In May 2023, average prices came down significantly as a result of the introduction of the Deutschlandticket, a nationwide flat-rate monthly travel pass. This dampening effect on the annual rate is now no longer felt. The core inflation rate (i.e. excluding energy and food) consequently rose robustly in May from 2.9 % to 3.5 %. The core rate is thus still well above the headline rate and above the long-term average for the years 1999 to 2023 (1.4 %).

The inflation rate is likely to fluctuate sideways in the coming months. This can be explained mainly by the volatility of energy prices last year. Base effects are likely to contribute to a small decline in the inflation rate up until September, followed by an increase up until the end of the year. By contrast, core inflation should gradually come down slightly, although the disinflation process is likely progressing somewhat more slowly than expected, most notably because of unexpectedly strong wage growth.

For more on the inflation outlook, see Deutsche Bundesbank (2024).

List of references

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

Footnotes

For further information on the outlook for the German economy, see Deutsche Bundesbank (2024).
Seasonal adjustment here and in the remainder of this text also includes adjustment for calendar variations, provided they can be verified and quantified.
Excluding the manufacture of motor vehicles and motor vehicle parts, industrial output declined.
The registration figures for new electric vehicles, in particular, have been very low since the sharp decline at the turn of the year. The end of the environmental bonus for private electric vehicles led to anticipatory effects in December 2023 and a sharp drop in the number of electric car registrations in January.
Despite the higher number of unemployed, the unemployment rate did not rise as the number of active workers also increased – partly owing to high immigration. The Federal Employment Agency adjusts this figure, which is used to calculate the unemployment rate, only once a year – usually in May – and in doing so catches up on the developments of the past 12 months.
For more on the inflation outlook, see Deutsche Bundesbank (2024).

Commentary: Economic conditions Monthly Report – June 2024