The global economy remained on a moderate growth path in the third quarter of 2024. The United States was yet again its main pillar. Its gross domestic product (GDP

The recent improvement in industry is unlikely to last. As in the second quarter, global industrial output rose perceptibly in the summer months, too. The economies of Asia, which are highly integrated into international value chains, were a significant factor in this. Global trade in goods expanded even more buoyantly. However, frontloading effects appear to have been playing a role in this. In the previous quarter, companies had already restocked their inventories in anticipation of possible trade policy frictions and the threat of disruptions to shipping. It thus remains to be seen whether the recent upswing will prove sustainable. This is also shown by recent purchasing managers’ surveys, according to which output growth in the manufacturing sector globally came to a standstill as of late and order books have continued to shrink. Political demands for new tariff barriers pose considerable additional risks to international trade.

Crude oil prices recently declined markedly. In addition to demand concerns, speculation about Saudi Arabia and other OPEC

Inflation rates continue to decline, mainly under the influence of energy prices, but core rates are still high. In the advanced economies, the year-on-year increase in consumer prices went down to 2.4 % by October. Three months earlier, this figure was 2.8 %. Energy price reductions contributed significantly to this decline. Over the rest of the year, however, such dampening influences on inflation rates are not expected to continue, and consumer price inflation is likely to be more strongly influenced again by core components (excluding energy and food). In this respect, underlying price pressures remain strong. Core inflation in the group of advanced economies stood at 3.1 % in October.

Ongoing disinflation and political uncertainty shaped events in the financial markets. Amid further improvements in inflation data and weaker economic signals, market participants initially adjusted their policy rate expectations for the United States and the euro area significantly downwards. For a time, market participants considered a pronounced rate-cutting cycle and thus an early end to restrictive monetary policy likely, which resulted in ten-year yields in the capital markets of major currency areas falling sharply. The beginning of the fourth quarter saw market participants’ expectations of policy rate cuts in the medium term being dampened by unexpectedly robust labour market and economic data in the United States, as well as the prospect of US

The differing economic outlooks were clearly reflected in the international equity markets, with strong price gains in the United States and price falls in the euro area and Japan. The nascent rate-cutting cycle and investors’ risk appetite, which has been growing again since mid-August, supported prices around the world. In the United States, especially, the assets of listed companies increased significantly. Market participants expect that the profits of listed companies – especially those of financial corporations – will benefit from the new US

At its monetary policy meetings in September and October 2024, the ECB

Adjustments to the monetary policy framework came into force with effect from 18 September 2024. The spread between the rate on the main refinancing operations and the deposit facility rate was reduced from 50 to 15 basis points. The spread between the rate on the marginal lending facility and the rate on the main refinancing operations remained unchanged at 25 basis points.

The rebound in monetary growth continued in the third quarter, but demand for loans to enterprises remained subdued. The recovery in the broad monetary aggregate M3

The rise in German economic output in the third quarter of 2024 came as a surprise. However, the outlook remains poor. According to the flash estimate by the Federal Statistical Office, seasonally adjusted real GDP

German banks’ lending business with the domestic non-financial private sector grew slightly in the third quarter. There are signs of a weak upward movement in lending to households for house purchase. The BLS

The protracted economic weakness also reached the hitherto very robust labour market in the third quarter. Employment declined slightly from its previous record highs. Strong sectoral differentiation continued. Manufacturing and trade jobs fell. By contrast, labour demand for services remained high, although in some segments employment was likewise increasing at a slower pace than previously. Unemployment continued to climb. While short-time work has increasingly been made use of in manufacturing for some time now, it still plays no major role in the overall economy. The outlook remains muted. According to leading indicators, there will be neither a significant improvement nor a major deterioration in the labour market situation in the coming months.

Negotiated wages saw a very strong increase in the third quarter. Including ancillary agreements, they went up by 8.8 % on the year in the third quarter. This is the highest year-on-year growth rate since the summer of 1993. It was mainly driven by very steep negotiated wage adjustments in the retail sector as well as in wholesale and foreign trade. These sectors negotiated high permanent wage increases, back payments and an inflation compensation bonus. Even disregarding these special payments and looking exclusively at basic remuneration levels, negotiated wages went up by 5.6 % year on year in the third quarter, once again outpacing the second-quarter increase. The phase of very high wage increases may have peaked in the third quarter, however. Actual earnings also look to have increased substantially.

High wage demands are coinciding with a weak economic setting. At present, trade unions’ wage demands are relatively high as, now that inflation compensation bonus payments have ceased, they are aiming to offset the losses in purchasing power that have occurred in recent years by securing permanent wage increases. However, the recently agreed wage increase in the metals and electrical engineering industry was fairly moderate, at 2.2 % per annum, given the strong deterioration in that sector’s economic situation. Given the prolonged period of economic weakness and significantly lower inflation rates, the other forthcoming wage negotiations are, on the whole, expected to result in distinctly lower agreements than in the past two years.

Consumer prices did not rise as sharply as before in the third quarter. Measured in terms of the HICP

Inflation was significantly higher again in October. Annual headline inflation rose from 1.8 % in September to 2.4 %. This was partly because energy prices came down markedly in October 2023, which was reflected as a base effect in inflation in October 2024, driving up the rate. The core rate likewise went up significantly from 3.0 % to 3.3 %. However, factoring out the volatile prices of travel and also clothing, the rate remained virtually unchanged at 3 %.

Inflation is expected to be somewhat higher still for a time. Energy prices fell significantly at the end of 2023. Viewed in isolation, this downward movement in the base year will push up inflation in the coming months. As regards travel services, dampening base effects no longer apply – here, too, prices dropped considerably in the previous year. As a result, the inflation rate is likely to go up considerably further still for a temporary period. At the beginning of next year, one-off effects will also have a price-driving effect. These include the price rise for the “Deutschlandticket” and probably also substantial increases in private health insurance tariffs. Without these one-off effects, the core rate is likely to gradually trend downwards. The strong wage growth in 2024 will keep inflation high, however, especially for services.

The lull in activity in the German economy is likely to persist in the fourth quarter as well. Industry and construction are likely to remain a dampener on economic output. Factors weighing on the propensity to invest, such as high uncertainty, financing costs that are still relatively high and low capacity utilisation in industry, remain in place. Foreign demand for German industrial products is still weak, even if a recovery is imminent here. According to ifo

The government deficit is likely to decline slightly this year and next in the absence of new decisions. However, a new course is likely to be set after the general election. This slight decline is driven by major divergent developments. The gradual expiry of temporary assistance in response to the energy crisis will reduce the deficit. In 2023, this assistance added around 1½ % of GDP

The collapse of the governing coalition will not require restrictive fiscal policy. However, the fiscal challenges facing the new Federal Government will be considerable. The general government budget is developing more positively in the current year than planned. Given the appropriate parliamentary majorities, certain fiscal policy leeway could be used by adopting a supplementary budget for 2024. The 2025 budget will probably have to be passed by a newly elected parliament, however. Until then, the rules for interim management of the budget will apply for 2025. These rules protect the government’s ability to meet existing obligations, thereby ensuring relatively stable fiscal policy. The Federal Government could take extrabudgetary measures in response to foreseeable and unavoidable needs. Greater political scope would then be opened up by the central government budget for 2025 and the new medium-term financial planning, which would need to be prepared taking national and European fiscal rules into account.

From the Bundesbank’s perspective, sound public finances are key to ensuring fiscal policy and macroeconomic resilience and tackling the current challenges. Sound public finances are not the antithesis of healthy macroeconomic developments, but instead a precondition. It is important to prioritise spending and ensure sufficient revenue.

Binding fiscal rules are intended to ensure sound public finances. A reform of the debt brake with moderately higher borrowing scope given a low debt ratio would be entirely justifiable. The Bundesbank has made proposals for a stability-oriented reform of the debt brake. A binding credit limit remains key. However, if the debt ratio is below 60 %, this limit could be higher than before. In this context, special expenditure could be given privileged treatment by dedicating part of the borrowing scope exclusively to it. The Bundesbank proposes a two-tiered credit limit for this purpose.

Sound and rule-based public finances in Germany promote stability in the euro area. That is another reason why Germany should rigorously apply the new EU