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) rose significantly in the third quarter, too, after price and seasonal adjustment. On the other hand, Chinese economic activity was once again anaemic, not least because of the ongoing real estate market crisis. Economic output in the euro area increased markedly, mainly due to one-off effects.

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 countries stepping up production is likely to have been the main driver behind the decline in prices. Overall, according to International Energy Agency estimates, the global oil market is likely to be significantly oversupplied next year. Given the outlook of ample supplies going forward, increasing tensions in the Middle East have only led to moderate and temporary price spikes.

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 budget deficits potentially being high. Term premia for longer-term US bonds increased, too. This rise was transmitted to interest rates in the euro area to a limited extent. At the end of the reporting period, ten-year government bond yields were mixed in relation to their end-June levels. However, the yield spread between the United States and the euro area increased. This contributed to the euro depreciating against the US dollar. The euro also depreciated slightly in effective terms against 18 trading partners.

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 government’s policy measures. In the euro area, by contrast, lower profit expectations and the looming prospect of tariffs dampened price movements. Amid growing risk appetite amongst investors, the yield spreads of long-term government bonds in the euro area and, in particular, corporate bonds fell.

At its monetary policy meetings in September and October 2024, the ECB Governing Council adopted two interest rate cuts. The deposit facility rate – the rate though which the Governing Council steers the monetary policy stance – was lowered by 25 basis points twice, reaching 3.25 %. Amongst other reasons, the Governing Council justified the interest rate cuts based on the fact that incoming data and the newly prepared September projections had confirmed the previous inflation outlook. It expects inflation to rise in the coming months, before declining to target in the course of next year. It nevertheless also stressed that domestic inflation remains high, as wages continue to rise at an elevated pace.

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 observed since autumn 2023 continued, with annual growth rising to 3.2 % at the end of September 2024. This increase is related to the monetary policy interest rate cuts: the changed interest rate environment reduced the attractiveness to investors of longer-term investment forms relative to their more liquid M3 counterparts. On the counterpart side, strong inflows from abroad were once again the main factor buoying monetary growth. With regard to bank lending, loans to households, which had been trending upwards since the autumn of 2023, gained in strength. Meanwhile, there are still no signs of a marked recovery in loans to non-financial corporations. This was due primarily to the fact that many enterprises were able to finance their investments internally. Consistent with this, the Bank Lending Survey (BLS) indicates that demand for loans to enterprises edged only marginally higher in the third quarter.

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 rose by 0.2 % on the previous quarter. Although this exceeded earlier expectations, the second-quarter decline in GDP was revised from 0.1 % to 0.3 %. Economic output thus remained weak overall in the summer half-year. In addition, it is difficult to derive an improvement to the underlying cyclical trend from the third-quarter increase in GDP. According to data from the Federal Statistical Office, rising government and private consumption expenditure was the main contributor, but, given the mixed picture for indicators for private consumption, this is expected to have increased only slightly. Thus, at the current time, none of the key demand components give any cause to expect a marked short-term recovery in the German economy. Private consumption benefited from the steep rise in wages in the third quarter but the labour market is becoming increasingly gloomy and the high level of consumer uncertainty – probably partly a result of said gloom – is likely to have dampened its growth. Exports, as well as output in the industrial sector and in construction, continued to decline. The still elevated financing costs and pronounced economic policy uncertainty were still weighing on investment and thus on demand for construction and capital goods. In addition, the fact that capacity utilisation is now very low was an additional drag on the propensity to invest in the industrial sector. In view of German industry’s deteriorating competitive position, no growth impetus came from the expanding German sales markets abroad. The industrial sector is under high pressure to adapt to changing structural conditions at domestic production sites and in global markets. The German automotive sector is particularly affected by this structural change.

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 indicates that households’ more upbeat assessment of housing market prospects and the decline in the general interest rate level in this segment contributed to demand. Lending business with the non-financial corporate sector, on the other hand, saw only minimal growth. Given the high level of uncertainty and their still sufficient stock of internal financing, German firms’ demand for external financing remained subdued. The banks surveyed in the BLS had not tightened their corporate lending policies for the first time in just under three years.

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, they rose by a seasonally adjusted 0.3 % in the third quarter, only just less than half as much as in the previous two quarters. Energy prices actually saw a marked drop. Industrial goods excluding energy became moderately more expensive. Services price inflation came down a little, yet remained unusually high. Food price inflation even intensified again. Year-on-year upward price pressures subsided. The headline inflation rate dropped from 2.6 % to 2.2 %. This was due not only to the declining energy prices in the third quarter of 2024, but also to a dampening base effect caused by the rise in energy prices in the third quarter of 2023. By contrast, the core rate excluding energy and food (3.1 %) remained almost as high as in the previous quarter.

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 Institute surveys, the share of firms in the main construction sector reporting a shortage of orders remained high in October, and equipment utilisation declined again slightly on the previous quarter. The labour market will probably continue to cool, with moderately declining employment and a slight rise in unemployment. Nevertheless, private consumption could expand again somewhat, as the sharply higher wages offer further scope for additional consumer spending. Consumers remain unsettled, however, and will probably make only tentative use of their additional scope for spending. All in all, economic output could be more or less stagnant in the fourth quarter.

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 to the deficit (total deficit for 2023 overall: 2.6 % of GDP). By contrast, considerable additional expenditure in many places is pushing up the deficit. For example, the Armed Forces Fund is likely to spend significantly more than in 2023. Similar developments are also visible in climate policy and, in particular, in the generation of electricity from renewable energy sources. Personnel expenditure is still rising significantly, especially in the wake of the high inflation of recent years, with the public sector lagging behind the private sector. In addition, weak economic developments are temporarily driving up labour market-related expenditure. Spending on pensions, healthcare and long-term care will probably rise dynamically. Overall, after a perceptible surplus in 2023, social security funds are likely to run deficits this year and next, despite sharply rising contribution rates to the health and long-term care insurance schemes.

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 fiscal rules to itself. Only in that way can the Federal Government credibly campaign for the application of the rules throughout the EU in a stability-oriented manner. The deficit and debt ratios in some Member States remain high, in some cases persistently. The new rules are designed to bring them down in a reliable manner. However, the requirements for country-specific budgetary limits have already proven to be highly complicated. Moreover, the procedure in which the Member State, the European Commission and Ecofin set the budgetary limits is fairly opaque. Going forward, it will be necessary to establish clear requirements, to explain them clearly and concisely, and to implement them. In order to strengthen confidence in sound public finances in the euro area, it is important that the reformed rules get off to a good start.