Wachstumskurve mit Kugelschreiber symbolisiert die wirtschaftliche Lage.

© iStock.com/blackred

  • At the end of the second quarter of 2021, the recovery of the German economy is in full swing. With more and more of the measures undertaken to combat the pandemic being eased, many segments of the services sector have been able to resume their economic activity. Even though the shortages in the supply of intermediate products in some parts of the manufacturing sector are having a dampening effect, this is not undermining the positive development of the overall economy.
  • In May, industrial output saw another slight decrease, which is primarily due to the shortages in the supply of semiconductors in the automotive industry. However, given the continued favourable development in new orders and the optimistic business sentiment, the outlook for industrial activity remains positive overall. Output in the construction industry stabilised at a high level.
  • Retail sales continued to climb in May and, given the current favourable development of the pandemic, the outlook for the coming months is also positive. The inflation rate slightly slowed in June; however, it has increased drastically since the beginning of the year – a development which is due to a number of special factors (raw materials prices, carbon pricing). In the second half of the year, the base effect from last year’s temporary reduction of VAT rates is likely to result in an inflation rate of 3% or more. However, once the special factors disappear, the inflation rate should once again fall considerably at the beginning of 2022.
  • The situation on the employment market improved substantially. Unemployment fell sharply in June in seasonally adjusted terms and gainful employment continued to pick up in May in seasonally adjusted terms. The number of persons in short-time work continued to fall in April, and the number of short time work notifications point to a further decrease in the future.
  • The rise seen in the number of companies filing for regular insolvency at the beginning of the year did not continue, with figures down significantly in April and May. In June, the number of regular insolvencies stayed at the same level as in May. However, given last year’s economic slump, the overall number of companies filing for insolvency in 2021 is likely to increase.

SUPPLY SHORTAGES HAVE DAMPENING EFFECT BUT ECONOMIC DEVELOPMENT OVERALL POSITIVE

The recovery of the economy is in full swing: the business climate continued to improve in the last few months, moving beyond pre-crisis levels for the first time in June. Sentiment in the industrial sector also continued to improve even though shortages in the supply of intermediate products are slightly dampening expectations. Altogether, the German economy is on an upwards trajectory. Industry has been very robust thus far; however, individual sectors may see a weaker development which is likely to continue over the next few months. For some time now, there has been a shortage in the supply of materials such as semiconductor products, which is now resulting in a decline in industrial output, particularly in the important automotive industry. This means that the latest decline in industrial output is once again due to supply-side issues, not weaker demand. This fact is also underpinned by the data on new manufacturing orders. The total number of orders fell in May; however, this was the result of a correction to foreign demand, which had risen rapidly in the last few months. Domestic orders continued to grow, reflecting the strong demand within Germany. Sentiment among German exporters also continues to be very favourable. Even though expectations were already high in May, June saw another considerable improvement. German exports increased for the thirteenth time in a row and have remained above pre-crisis levels (average figure for the fourth quarter of 2019) since March. Global industrial output and global trade have seen a similar development, reaching new record-highs above pre-crisis levels.

The continued relaunch of services, which had begun last month, resulted in another marked improvement in the business climate in almost all individual sectors. Retail sales picked up strongly in May and the consumer sentiment registered by GfK in June was the highest seen since August 2020. Given the current favourable development of the pandemic, consumer sentiment is expected to further improve in July. These developments coincide with positive signals from the labour market, which is expected to continue its recovery. After a fall in GDP in the first quarter, economic development in the second quarter was overall positive and should have stimulated strong growth, which should pick up further in the second half of the year. Here, the risk from new virus variants and their influence on infection rates, the extent of which remains unclear, will be the most important source of uncertainty for the further development of the economy.

POSITIVE OUTLOOK FOR THE GLOBAL ECONOMY

The global economy continues to recover. As in March, global industrial output in April rose by 0.2% month-on-month. The volume of global trade has already returned to pre-crisis levels, rising by another 0.5% in April. The sentiment indicators also reflect a favourable development of the global economy. In June, the J.P. Morgan/IHS Markit composite purchasing managers’ index fell by 1.9 points, reaching 56.6 points. However, it had risen constantly over the four preceding months and is still well above the growth threshold of 50 points. In the industrial sector, the current fall is probably due to the continuing shortage of intermediate goods. In the services sector, the COVID-19 delta variant, which is more contagious, could explain the dampened sentiment.

EXPORTS STABLE, STRONG RISE IN IMPORTS

German foreign trade continues to pick up after the crisis. In May, the value of goods and services exports rose by 0.3% over the preceding month, adjusted for seasonal variations and on a nominal basis (April: +0.6%, revised upwards). The two-month comparison shows a significant 1.7% rise in exports. Following a 1.1% drop in April (figure also revised upwards), imports picked up strongly in May, rising by +3.1%. The two-month comparison shows a plus of 3.3%.

The leading indicators on German foreign trade and investment only partly reflect the dynamic development of global trade. New orders from abroad saw a major decline between April and May, falling by 6.7%. Nevertheless, ifo’s export expectations for the manufacturing sector improved noticeably in June. The last time companies were this optimistic was in 2011. This means that the outlook for Germany’s foreign trade remains positive, not least thanks to the strong growth registered by important sales markets in Asia and the United States.

POSITIVE OUTLOOK FOR INDUSTRIAL ACTIVITY DESPITE SLIGHT DECLINE IN OUTPUT

Manufacturing output in May saw another drop compared with the preceding month, falling by 0.3%. Industrial output in May decreased by a slight 0.5%, following a decline of 0.4% in April and a rise of 0.8% in March. In contrast to this, construction output recently saw a plus of 1.3%, stabilising at a high level.

The two-month comparison for April/May compared with February/March shows a slight increase of 0.6% in manufacturing output. Whilst industrial output fell by a slight 0.2%, construction output picked up by 3.1% in the two-month comparison, which is due to a weak February marked by cold weather. Within industry, the important sector of cars and car parts recorded a sharp drop of 6.9%. In contrast to this, mechanical engineering, a sector of similar importance, grew by 2.4%.

In April, new orders in the manufacturing sector fell substantially (-3.7%).
This is the first drop in new manufacturing orders this year. It is the result of the weaker foreign demand (-6.7%). Orders from outside the eurozone saw a particularly sharp drop (-9.3%), with orders from the automotive sector most affected (-14.4%). This can be seen as a development offsetting the particularly high growth rates registered in April (non-eurozone: +4,0 %, of which cars: +10,6 %). Domestic orders picked up by +0.9%.

Overall, the outlook for industrial activity remains positive, even though industrial output has once again been slightly dampened, which is primarily due to shortages in the supply of semiconductors in the automotive industry. Ifo’s business climate index for the manufacturing sector recently improved substantially, reaching its highest level since April 2018. Sentiment among German exporters also picked up significantly, reaching its highest level since January 2011. Even though May saw a sharp fall in new orders, these remain at a high level thanks to the continuous increases of the preceding months.

RETAIL TRADE: CURRENT SITUATION AND OUTLOOK BOTH IMPROVE

Retail sales (without cars) are once again picking up. Following a decrease of 6.8% in April, retail sales in May increased by 4.2% month-on-month. This positive month-on-month comparison is likely due to a more favourable development of the pandemic and the easing of coronavirus-related restrictions. According to the latest figures, the level of retail sales registered in February 2020 – the last month before the onset of the COVID-19 crisis – was exceeded by 3.9%. The non-food retail sector recently recorded a substantial increase in sales, rising by 6.7% compared with the preceding month. Trade in textiles, clothing, shoes and leather goods grew by 72.1% whilst e-commerce and mail order services rose by 5.7%. New vehicle registrations by private owners saw another slight increase in June (+2.1%). Whilst the number of new registrations still falls considerably short of the sales figures seen in the second half year of 2020 when VAT rates had temporarily been reduced, they are still well above the lowest level recorded during the crisis, which was in April 2020.

Ifo’s business expectations for retail trade, which were virtually balanced before, returned to a slightly positive level on balance in June. GfK’s consumer sentiment index reached its highest score since August last year and, with ever more restrictions being lifted and ever more people vaccinated, is expected to see another significant improvement in July.

Consumer prices were up 0.4% in June, compared to the preceding month. This compares to a 0.5% increase between April and May. The inflation rate, the year-on-year development of prices, stood at 2.3% in April (as compared to 2.5% in May). Even though the inflation rate has recently gone down slightly, it has increased considerably since the beginning of the year. Following the reduction of VAT rates, it had been negative for almost the entire second half of 2020. Reasons for the increase in the inflation rate in the first months of this year include the recovery in import and raw materials prices, and the introduction of carbon pricing for the transport sector and the heating of buildings. Unlike last year, when energy prices put a strong damper on consumer prices, they are now among the factors pushing up the inflation rate. In the second half of the year, the inflation rate should increase to 3% or more due to the base effect created by the temporary reduction of VAT rates in the second half of 2020. Once these special effects disappear, the upward trend in consumer prices is likely to weaken again at the turn of the year compared to the preceding year. As there are currently no indications of a wage-price spiral – which can cause a permanent increase in inflation – the inflation rate is currently not expected to continue to rise. The core inflation rate (without energy and seasonally dependent foods) dropped to +1.7% in June (from +1.9% in May). Even though energy prices last saw a sharp increase of +9.4% compared to the preceding year, they did not increase as much as in May.

SUSTAINED RECOVERY OF THE LABOUR MARKET

The labour market shows strong signs of improvement, creating a positive outlook for the months to come. As the measures undertaken to combat the coronavirus crisis are gradually being eased, the labour market is increasingly recovering from the third wave of the pandemic. Unemployment and underemployment in June fell sharply (in seasonally adjusted terms), decreasing by 38,000 persons and 47,000 persons respectively. According to the original data, unemployment fell markedly by 73,000, to now stand at 2.61 million people. The year-on-year gap stood at -239,000 people. In May, gainful employment saw another slight increase, rising by 10,000 persons (seasonally adjusted) and thus once again exceeding the level of the preceding year (around +48,000 persons). The demand for workers continued to pick up in June. Following strong increases in the two preceding months, employment subject to social security contributions in April rose only slightly (+4,000 persons, seasonally adjusted). Extrapolations show that 2.3 million people were in short-time work in April, a lot fewer than in March (2.7 million). Short-time work notifications (around 59,000 between 1 and 24 June compared with 112,000 in May) indicate that the use of the short-time work scheme will continue to slow. The survey-based leading indicators of the Institute for Employment Research and ifo developed very favourably again in June, reaching their highest scores since October 2018 or since records began. In the industrial sector, employers’ willingness to recruit new staff has kept rising since May 2020, and there was also another clear jump upwards in the services sector. Trade is cautiously optimistic whilst construction industry continues to see a slightly positive trend in the willingness to recruit new staff.

STILL NO WAVE OF INSOLVENCIES IN SIGHT

In June, the number of insolvencies filed stayed at the same level as last month. The Federal Statistical Office announced a small 0.4% increase in the number of companies filing for insolvency in June compared to the preceding month. In April and May, the number of insolvencies had fallen by 17% and 7% respectively. Experts expect 3,000 to 7,000 additional insolvencies this year, which would be a rather moderate increase over the preceding year. The development seen in the first half year also suggests that there will be no marked rise in the number of companies defaulting. There are still no signs of a wave of insolvencies.