Monthly Report – September 2024

Article from the Monthly Report

1 Economic conditions

1.1 German economy continues to be weak

The German economy is still navigating choppy waters. Output in the industrial sector and in construction got off to a sluggish start in the third quarter of 2024, with heightened economic policy uncertainty weighing on business. Furthermore, higher financing costs are still making themselves felt; this is dampening demand for industrial goods and construction work, in particular. Although new orders from abroad appear to be beginning to recover slightly, this did not so far suffice to mitigate the lack of orders in industry overall. In spite of favourable conditions – negotiated wages are growing strongly and the labour market outlook remains relatively stable – private consumption is still struggling to get off the ground. Sentiment indicators and data on new passenger car registrations, for example, suggest that consumers remain cautious about spending. Uncertainty about the future outlook for private consumption and services is currently elevated, however. Seasonally adjusted sales in the trade and services sectors are not yet available for the whole of the second quarter. 1 Overall, from today's perspective, real gross domestic product (GDP) could stagnate or decline again somewhat in the third quarter. The prospect of a recession , in the sense of a sharp, broad-based and persistent decline in economic output, looks unlikely at the current time, however.

1.2 Weak domestic demand weighs on industry

While domestic demand remained weak, the overall slightly more dynamic economic activity in the euro area propped up demand for German industrial products. After seasonal adjustment, 2 new orders in Germany’s industrial sector rose substantially in July 2024 for the second consecutive month. Excluding large orders, the intake of orders was down slightly on the previous month but, in a quarter-on-quarter comparison, new orders were up significantly overall and slightly higher when excluding large orders. A small recovery is thus beginning to emerge. Industrial orders excluding large orders had already risen again in the second quarter, following a period of decline since the third quarter of 2022. As in the second quarter, positive impetus was provided from abroad, in particular from the euro area. In July, however, new domestic orders excluding large orders were down on the level of the previous quarter. Overall, the increase in new orders was still not enough to mitigate the lack of orders in industry, however. According to the quarterly ifo Institute survey, more than 40% of manufacturing firms complained of a lack of orders in July. This share is thus once again up on the already high April figure. At the same time, the reach of order books remained high in a long-term comparison. Together with the very low capacity utilisation, this might indicate that firms are spreading their orders over a longer period. 

The bout of weakness in industrial output continued at the beginning of the third quarter. In July, seasonally adjusted industrial output fell strongly on both the month and the quarter. Almost all sectors were affected by the decline. Production in energy-intensive sectors was down somewhat as well, following two quarters of rising output. Only output in the chemicals industry was still above the average of the previous quarter, despite declining on the month. Motor vehicle production recorded a particularly steep decline in July, but there may have been a strong countermovement here in August. According to the German Association of the Automotive Industry (VDA), the number of passenger cars manufactured rose very substantially in August. This suggests that special factors such as plant shutdowns also played a role in the strong decline in July. Taking the more meaningful average of July and August combined, the number of passenger cars manufactured exceeded the previous quarter's level considerably. However, industry is likely to continue to weaken over the remainder of the third quarter as well. According to ifo Institute data, firms assessed their situation as less favourable in August. Short-term production plans and export expectations likewise deteriorated.

1.3 Private consumption likely to remain dampened initially

Private consumption is still lacklustre in spite of favourable conditions. Wages are rising significantly more strongly than prices. After posting smaller growth in the second quarter for a time, negotiated wages are likely to rise very sharply in the third quarter. As defined in the Bundesbank’s negotiated pay rate statistics, they were up by 10.6% on the year in July. The significant fluctuations are due in large to inflation compensation bonuses, wage increases with a time lag and the back payments agreed in some of the more recent pay settlements. Furthermore, employment is increasing slightly and the labour market outlook is relatively stable. At least some of the resulting gains in purchasing power are expected to gradually be reflected in private consumption. Consumers are likely to continue to hold back on spending, however. Consumer sentiment improved when compared with the previous quarter but the GfK consumer climate index became perceptibly gloomier again in August. The economic expectations of surveyed consumers deteriorated significantly, and income expectations even fell strongly. The propensity to purchase decreased slightly in the meantime, with the propensity to save increasing in line with this. Data made available by the German Association of the Automotive Industry (VDA) indicate that consumers are reluctant to purchase cars. Taking the average of July and August combined, new passenger car registrations dropped significantly compared with the previous quarter. Among the relevant private consumption indicators, seasonally adjusted sales in retail trade and in the hotel and restaurant sector are currently only available up to April, in a break from standard practice. However, taking the average of July and August combined, the business situation deteriorated in both areas compared with the previous quarter, according to ifo Institute surveys. All of this indicates an ongoing uncertainty among households.

1.4 Lack of stimulus in the labour market

The absence of any economic stimulus is gradually having an impact on both labour market developments and the outlook. The level of employment in Germany is exceptionally high. However, employment growth has weakened of late. Seasonally adjusted total employment barely rose in July (+4,000 persons). This is due to a moderate decline in employment in manufacturing, construction and trade, which was just about offset by additional hirings in some service industries. In terms of number, more large-scale redundancies are prevented in manufacturing by a gradual increase in short-time work. In June, 2.7% of all employees subject to social security contributions were in short-time work. Short-time work is virtually irrelevant in other sectors, however. 

The lack of a recovery is impacting the employment plans of firms in parts of trade and industry. The ifo employment barometer stabilised in the first half of the year following a two-year period of decline. However, it fell again in the holiday months to its lowest point since the pandemic. Employment expectations are considerably negative in the manufacturing and trade sectors. However, the picture painted by other leading indicators is not nearly as conclusive. For the economy as a whole, the employment barometer of the Institute for Employment Research (IAB) is more stable and remains in positive territory. The number of vacant positions reported to the Federal Employment Agency has fallen by just over one-fifth since mid-2022. At the same time, this number has remained relatively high and the process of filling positions is still difficult and time-consuming. The heterogeneous picture painted by the indicators is likely to be attributable to, amongst other things, the pronounced structural change, which alongside the pre-existing lull in orders in parts of manufacturing, construction and trade led to strong demand in some sectors, such as healthcare and long-term care, education, and energy and water supply. 

Unemployment barely rose any further in August. In seasonally adjusted terms, 2.80 million persons were registered as unemployed. This was only around 2,000 persons more than in July. The increases had been more significant in previous months. The unemployment rate persisted at 6.0%. Compared with the previous year, unemployment under the cyclically sensitive statutory unemployment insurance scheme increased by 111,000 persons, whereas growth in the number of unemployed receiving the basic welfare allowance was smaller, at 65,000. Higher unemployment is primarily a result of the persistent economic weakness. Alongside higher unemployment in the statutory unemployment insurance scheme, this is likely to be a factor behind some of the increase in the number of basic welfare allowance recipients, as some unemployed persons were no longer entitled to claim insurance benefits. However, the integration of immigrants into the German social security system, particularly significant in 2022-23, is likely to play only a secondary role. The IAB unemployment barometer suggests unemployment will rise only slightly over the next few months. 

1.5 Energy commodity prices mixed recently

Developments in energy commodity prices have been mixed recently. Crude oil prices declined significantly over the past weeks. As this report went to press, a barrel of Brent crude oil cost US$77, around 11% less than as recently as July. This can probably be attributed mainly to demand concerns and the glut in the global oil market anticipated for 2025. By contrast, prices were propped up by the decision of some OPEC countries and their partners to postpone their proposed production increases for the time being, as well as by production stoppages in Libya and the United States. On the other hand, European gas prices rose slightly of late due to concerns about Russian gas deliveries through Ukraine. 

1.6 Inflation rate sinks to 2.0% in August

Price developments at the upstream stages of the economy were uneven as of late. In industrial domestic sales, prices rose slightly in July after seasonal adjustment. This was true of both energy and other goods. By contrast, import prices were down slightly. This was mainly due to a steep fall in energy prices, yet other goods were also slightly cheaper. Compared with the previous year, industrial producer prices were still around 1% down on their level at that time, however, whereas the rise in import prices was similar to that of the previous year.

The inflation rate fell surprisingly significantly in August. The Harmonised Index of Consumer Prices was unchanged from the previous month in seasonally adjusted terms. On the one hand, energy prices declined significantly. The recently depressed profit margins for refined petroleum products are unlikely to have seen much of a recovery. Prices of other industrial goods likewise fell perceptibly. On the other hand, food prices rose slightly. Prices for services climbed significantly higher again overall when compared with the previous month. This was partly attributable to travel services. The rise in prices for less volatile services components remained above average but was not as substantial as in the previous months. On balance, headline inflation fell considerably from 2.6% to 2.0% year-on-year. 3 The increase in energy prices in summer 2023 had a dampening effect here. Core inflation excluding energy and food decreased a little less sharply, from 3.3% to 3.0%.

Higher inflation figures are expected again over the coming months. In September, inflation is likely to initially remain at a similarly low level to that seen in August, as energy prices are expected to be down markedly on the year for now. Inflation is subsequently expected to rise again slowly. Taken in isolation, energy prices, which dropped significantly last autumn, will push up the annual rate of inflation as a base effect from October. In addition, the narrow profit margins for refined petroleum products could recover, which would counteract the recent decline in crude oil prices. Owing to substantial wage growth, the underlying upward pressure on prices will probably not drop much further from an already high level for now.

2 Public finances

2.1 Public long-term care insurance scheme

The public long-term care insurance scheme posted a deficit of €1 billion in the first half of 2024. Due to one-off effects, this was up by almost €½ billion on the year. This was chiefly attributable to transfers to the long-term care provident fund from the core area of the long-term care insurance scheme being discussed here. 4 These transfers had been deferred in the previous year and are being back paid in the current year. Factoring out these transfers would result in a surplus of close to €½ billion and a €1 billion improvement in the scheme’s outturn in the first half of 2024.

The public long-term care insurance scheme’s revenue rose sharply in the first half of 2024, in particular as a result of a contribution rate hike in mid-2023. Almost two-thirds of the increase of just over 18% in contribution receipts was attributable to the hike in contribution rates. At the same time, the sharp rise in earnings subject to compulsory contributions and pension payments had an impact. Meanwhile, the annual central government grant of €1 billion only introduced with the long-term care reform in 2022 was discontinued. In the previous year, this grant had been paid out almost entirely in the first quarter, meaning that revenue from central government was now down sharply.

The long-term care insurance scheme’s expenditure continued to exhibit considerably stronger growth than earnings subject to compulsory contributions and pensions in the first half of 2024. Overall, expenditure rose by almost 15%. After deducting the transfers to the long-term care provident fund, this still amounts to growth of just over 10%. This increase was not solely due to the demographically driven rise in those receiving care benefits but was compounded at the start of 2024 by increases in the long-term care allowance and non-cash benefits for home care as well as a further decrease in co-payments for inpatient care.

A significant deficit is anticipated for 2024 as a whole, which may result in contribution rates being raised next year. Expenditure can be expected to continue increasing significantly, whereas the revenue growth from the contribution rate hike will fall away in the second half of the year. The financial result for the second half of the year is therefore unlikely to show an improvement on the first half, as would normally be the case. The scheme's reserves, which were still €2 billion above their lower limit at the end of 2023, would then be at risk of falling below it. A further contribution rate rise could therefore be on the cards as early as next year.

2.2 Statutory health insurance scheme

In the first half of 2024, the statutory health insurance (SHI) scheme recorded a high deficit of €8½ billion – just over €2 billion more than a year earlier. At €6½ billion, the bulk of that was attributable to the health fund. It is drawing on reserves to stabilise the supplementary contribution rate, as politically intended. However, health insurance institutions likewise posted a deficit of €2 billion – after a deficit of only €½ billion a year earlier. Above all, this was due to a strong rise in expenditure on benefits of just over 7½%. 5 This expenditure markedly exceeded the expectations held by the group of SHI estimators in autumn of last year (+6%), on which basis the health insurance institutions had determined their supplementary contribution rates for 2024.

The health insurance fund's deficit is likely to fall below its mid-year level over the remainder of the year and to be well covered by reserves. As usual for the time of year, the result will be improved at year-end by SHI scheme contributions paid on bonuses. Furthermore, earnings subject to compulsory contributions are likely to increasingly replace inflation compensation bonuses exempt from social contributions. This will further support revenue developments. The deficit could thus reach the €4 billion figure 6 derived from the plans for 2024 as a whole. Reserves, which had stood at €9½ billion at the end of 2023, would thereby continue to comfortably reach their minimum level of just over €4½ billion at the end of 2024.

However, the situation is far more tense for health insurance institutions. Their average supplementary contribution rate had markedly increased at the start of the year already to the level of 1.7% then deemed necessary by the Federal Ministry of Health to cover expenditure. At the end of 2023, health insurance institutions’ overall reserves had still been just over €3 billion above the statutory lower limit for 2024. If the deficit recorded at the mid-year mark is extrapolated, calculations indicate that this margin would be whittled away. There is no alleviating seasonal factor like there is for the health fund, because it makes fixed monthly payments to the health insurance institutions. Against this backdrop, several health insurance institutions have already raised their supplementary contribution rates markedly over the course of this year: the average rate stood at almost 1.8% in August, and additional increases are already anticipated. 7

The group of SHI estimators will discuss further financial developments beyond the current year in October. Subsequently, the Federal Ministry of Health will calculate the supplementary contribution rate necessary to cover expenditure for 2025. As expenditure is likely to continue rising sharply, a further increase in this rate is already on the cards.

List of references

Deutsche Bundesbank (2024), Commentaries, Monthly Report, March 2024.

Federal Ministry of Health (2024), Finanzentwicklung der GKV im 1. Halbjahr 2024.

Federal Statistical Office (2024), Wiederaufnahme der Konjunkturberichterstattung im Handel und Dienstleistungsbereich, press release No 332 of 30 August 2024.

GKV-Spitzenverband (2024), GKV-Finanzen: Weiter „Augen zu und durch“ ist keine Option.

 

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