The global economy remained on a moderate growth path at the beginning of the year, and the regional disparities among the advanced economies narrowed somewhat. Economic output in the euro area, which had continued to decline in the previous quarter, started to rise markedly again. By contrast, the previously strong economic growth in the United States weakened. China’s economic activity gained in strength, partly as a result of economic policy support measures. 

Survey results point to global economic activity increasingly gathering pace in the spring. According to surveys of purchasing managers, business conditions around the world have improved markedly in recent months. Industrial activity in the emerging market economies continued to gather momentum. By contrast, industrial output remained weak in the advanced economies, where the services sector was the main contributor to the improved sentiment. 

Numerous commodity prices have picked up again somewhat in recent months. Oil prices, in particular, went up significantly at times. The improved demand outlook and renewed production cutbacks by some OPEC

The disinflation process has recently slowed down. Consumer price inflation in the group of advanced economies has hardly eased at all since January. At 3.0 % in April, the annual rate was only slightly below the level recorded for January, not least because of higher energy prices. Meanwhile, the core rate (from which energy and food prices are stripped out) fell somewhat more sharply, but remained high at 3.4 %. The robust wage growth in many places and the recent pick-up in demand could make the disinflation process more difficult going forward.  

The idea that interest rates would be cut early and quickly still prevailed in international financial markets at the beginning of the year. Market participants gradually abandoned this idea on account of improved economic data and stalling disinflation in the United States in particular. At the beginning of the year, market participants initially expected that interest rate cuts would already begin in the spring. Due to stalling disinflation and positive economic signals, central banks, including the US

Risky assets benefited from a positive boost to the economy and investors’ rising risk appetite. In the European corporate bond markets, for example, yield spreads over safe federal bonds (Bunds) narrowed markedly. In addition, the international equity markets were boosted by enterprises’ stable earnings performance. In the reporting period, foreign exchange markets were also shaped by strengthening expectations that a US

At its monetary policy meetings in March and April 2024, the Governing Council of the ECB

In March, the Governing Council additionally announced changes to the operational framework for steering short-term interest rates. The review announced in December 2022 was intended to ensure that the operational framework remains appropriate as the Eurosystem balance sheet normalises. The Governing Council therefore agreed on key principles and parameters that will guide monetary policy implementation and the provision of central bank liquidity. In particular, the spread between the interest rate on the main refinancing operations and the deposit facility rate will be reduced to 15 basis points from the current spread of 50 basis points as of September 2024.

The broad monetary aggregate M3 saw only moderate growth in the first quarter of 2024. M3

German economic output rose somewhat in the first quarter of 2024. According to the Federal Statistical Office‘s flash estimate, seasonally adjusted real gross domestic product (GDP

In Germany, lending business with non-financial corporations moved sideways on balance in the first quarter. This was due, on the one hand, to the fact that the rise in financing costs, coupled with the uncertain economic prospects, reduced loan demand for many enterprises. On the other hand, credit standards also continued to suppress lending. Lending business with domestic households grew slightly again for the first time following three weak quarters. The main driver here was loans for house purchase, which saw considerably stronger growth than in the preceding three quarters. At the same time, consumer credit and other lending to households continued to decline at unabated pace.

The German labour market was very stable in the first quarter of 2024, too. Employment growth continued on a muted positive track. Over the course of 2023, enterprises largely retained their workforces despite the economic slowdown and staff levels were even increased in many services sectors. However, the increase in the first quarter of 2024 was not strong enough to fully absorb the number of active workers, which is rising as a result of immigration in particular. Registered unemployment therefore increased as well, though likewise by only a marginal amount. Leading indicators suggest that this pattern is unlikely to change markedly over the next few months. Even if economic developments turn more positive, it is likely that greater use will be made of current staff in the first instance. The currently depressed level of working hours would then recover.

Wages rose steeply in the first quarter of 2024. In the first quarter, negotiated wages went up by 6.2 % on the year. Large social contribution-exempt inflation compensation bonuses also played a role here. 

Actual earnings are also likely to have risen sharply once again. Recent wage agreements and trade unions’ wage demands, which are still high by historical standards, also point to continued high wage growth. Although inflation has declined considerably since its peak in autumn 2022, unions remain aware of the accumulated real wage losses of the past three years and are aiming for a sustained increase in real wages. In addition, no more temporary, social contribution-exempt inflation compensation bonuses will be awarded at the end of 2024. Permanent wage hikes are now therefore increasingly taking greater prominence. 

Price pressures edged up again slightly in the first quarter. In the first quarter of 2024, consumer prices (HICP

Prices also rose somewhat more sharply in April. After seasonal adjustment, the HICP

Inflation is expected to rise again in May and could fluctuate at a slightly higher level over the next few months. This is predominantly due to base effects stemming from local public transport, with average ticket prices down sharply owing to the introduction of the “Deutschlandticket” in May 2023. In addition, looking at the year-on-year figures, energy prices are likely to rise again in May and later in the year owing to base effects. Risks to the underlying disinflation process persist overall. Wage growth has exceeded expectations of late, which could mean that the still high price pressure in services will persist for longer.

Economic output is expected to rise again slightly in the second quarter of 2024. Service providers are likely to continue their recovery. ifo

German public finances are likely to continue to improve this year and next, with the decisive factor being the discontinuation of crisis assistance. The deficit ratio could decline to under 2 % this year, having stood at 2.5 % in 2023. The expiry of the energy price brakes will actually provide slightly more budgetary relief than it did in the previous year. However, this is counterbalanced by strong growth in several expenditure items, first and foremost, the Armed Forces Fund and the Climate Fund. The deficit ratio looks set to shrink further next year. This can mainly be explained by additional revenue as inflation compensation bonuses will again be subject to tax and social security contributions. Without this, the deficit ratio would probably more likely move sideways. 

The debt ratio is also likely to decline, but this will be partially offset by increasing obligations arising from EU

Overall, public finances are unlikely to have an excessively restrictive effect on economic developments this year or next. The concerns expressed in some quarters therefore seem exaggerated, and an economic upturn can be expected. In 2024, the general government deficit will decline in net terms purely due to the discontinuation of the energy price brakes. This should have only a minimal impact on economic growth, partly because upstream gas and electricity prices in 2024 are set to be lower again than in 2023. Looking ahead to the coming year, it is often overlooked that central government and its off-budget special funds still have broad leeway for deficits. These include deficits for cyclical burdens and financial transactions, the remaining reserves and the Armed Forces Fund’s leeway for deficits. 

Federal budget and Climate Fund could develop more favourably in 2024 than planned. As a result, they could still have significant reserves going into 2025. The deficit in 2025 could thus be higher without violating the credit limit under the debt brake. Budget negotiations are currently difficult. However, this appears to be because considerably more funds have been requested as compared with the framework set out by the Ministry of Finance. In any case, central government’s scope for deficits, including its off-budget entities, is unlikely to be much lower than the deficit currently expected for 2024. 

Further discussions are taking place with regard to the debt brake. The Bundesbank deems a stability-oriented reform to be worthy of consideration. As long as the debt brake applies consistently, it will be well able to safeguard sound government finances, even if the credit limit is moderately higher. Specifically, a higher credit limit seems acceptable given a debt ratio of below 60 %. If the national rules then ensure that the structural general government deficit ratio stays below 1½%, this should, generally speaking, also fulfil the new EU