The economic situation in Germany in January 2022 [1]

• In 2021, gross domestic product increased by 2.7%, following a decline of 4.6% in the previous year due to the pandemic. [2] The final quarter of 2021 is expected to have been weak, given the renewed restrictions in contact-intensive services and difficulties in industrial production due to continued supply bottlenecks.
• However, the situation in industry has stabilised in the last two reporting months. Following a significant increase in October, industrial output rose again slightly in November. New industrial orders also rose noticeably again recently. The mood in manufacturing companies improved for the first time in six months.
• Retail turnover improved again in November, reaching levels well above those from February 2020, i.e. before the crisis. According to an estimate by the Federal Statistical Office, the retail sector in Germany achieved record sales overall in 2021. However, the outlook for the coming months has been overshadowed by the worsening of the pandemic and a high inflation rate.
• The inflation rate increased again slightly in December, rising to 5.3%. From January, however, the upward trend in consumer prices is likely to weaken noticeably, since special factors still remain well above pre-crisis levels, even if they are playing a lesser role. However, the ongoing supply bottlenecks for important upstream products are likely to persist for some time. The resulting pressure on prices is expected to ease only gradually over the course of the year.
• The recovery on the labour market continued, but this momentum could start to weaken due to the spread of the Omicron variant. In December, unemployment fell once again significantly, with levels of gainful activity continuing to see a strong increase in November (all in seasonally-adjusted terms). Short-time work fell slightly in October, dropping to 0.7 million, although there have recently been more notifications of cyclical short-time work again.
• In 2021, the number of corporate insolvencies is again expected to have been lower than in the previous year and have fallen to a new record low. From January to October, there were only 11,738 corporate insolvencies – around 14% down on the previous year. There are no indications of a significant rise in insolvencies at the end of 2021. For the current year, experts expect limited catch-up effects, but this is unlikely to pose a macroeconomic risk.

RENEWED RESTRICTIONS IN CONTACT-INTENSIVE SERVICES AND CONTINUED SUPPLY CHAIN DISRUPTIONS IN INDUSTRY

The German economy grew by 2.7% in 2021, following a sharp drop in gross domestic product in 2020 due to the coronavirus crisis. Last year, industry suffered from severe supply bottlenecks for key intermediate products and – despite full order books – was unable to ramp up production to full capacity again. Some service sectors had to face painful pandemic-related restrictions on their business operations at the beginning of the year and again towards the end. It is now important to come through the second pandemic winter well by making continued progress on vaccinations and to ensure the continuation of business activities. If the supply bottlenecks gradually ease in the course of the year, it is likely that the economic recovery will pick up speed again.

Latest figures for economic activity: The indicators suggest that the situation in industry has stabilised in recent months. Industrial production developed more positively again after seeing a slowdown that started at the beginning of last year due to supply bottlenecks affecting key upstream goods and raw materials. In December, the mood in manufacturing companies improved again for the first time in six months due to more optimistic business expectations. Retail turnover excluding motor vehicles also rose again in October and November, and new car registrations by private owners experienced strong growth towards the end of the year. According to initial estimates by the Federal Statistical Office, retail sales excluding motor vehicles increased in Germany in 2021 overall, reaching a new record high, albeit with large differences in the development of the individual retail sectors. Most recently, consumer spending dropped due to the pandemic and the high inflation rate. In view of the increasing spread of the Omicron variant, the consumer climate has weakened.

The inflation rate stood at 5.3% in December 2021, reaching its highest level since June 1992. The inflation rate in 2021 as a whole was 3.1%; the last time a higher level was recorded was in 1993. At the beginning of the year, however, the price-driving special effect resulting from the reduction in VAT rates ceased to have an impact since this reduction expired in January 2021. Over the course of this year, the upward trend in consumer price levels is expected to slow down as the energy price situation starts to ease again and the shortage of intermediate goods will gradually be overcome. The recovery of the labour market continued until recently. However, there are signs that the amount of short-time work could rise again, as indicated by the number of short-time work notifications in December. Even if the development of the labour market loses momentum due to the increasing spread of the Omicron variant, it is likely that most companies will try to retain their employees in order to prevent a shortage of skilled workers.

SLIGHT RECOVERY OF THE GLOBAL ECONOMY IN SPITE OF SUPPLY BOTTLENECKS

The global economy picked up somewhat in October. Global trade saw an increase of 1.6% over the previous month. This growth made up for the losses experienced in late summer and global trade is now back at the level seen in June. However, it has not yet been able to climb back up to the peak level reached in March. Global industrial output also increased, albeit only slightly (up +0.8% on September). The global economy has been hit by supply bottlenecks affecting key upstream goods and raw materials and the resulting upward pressure on prices. Not least due to the additional difficulties experienced by the services sector as a result of the rise in the number of coronavirus infections, the OECD Composite Leading Indicator is continuing on the downward trend it has been on since June. Currently, however, business sentiment has stabilised. In November, the J.P. Morgan/IHS Markit composite purchasing managers’ index rose by 0.3 points, reaching 54.8 points. And the indexes for the services sector and industry are also well above the growth threshold of 50 points, sitting at 55.6 points and 54.2 points respectively.

EXPORTS AND IMPORTS CONTINUING TO INCREASE NOTICEABLY

Exports of goods and services rose by 2.1% between October and November in seasonally adjusted terms and in current prices (October: +3.3%). The two-month comparison shows a strong increase of 5.2%. With export prices rising only moderately, exports increased again appreciably in price-adjusted terms. In nominal and seasonally adjusted terms, imports of goods and services again rose markedly in November, up 3.3% compared with the previous month (October +3.0%). Imports of goods and services rose again substantially in November, climbing by 3.3% (in seasonally adjusted terms and on a nominal basis). The rate of increase is even higher in the two-month comparison (+5.8%). In view of sharply rising import prices, however, the price-adjusted increase in imports is likely to be smaller.

The leading indicators for foreign trade and investment at national level reflect the current gap between supply and demand. New foreign orders increased by 8.0% in November compared with the previous month, reaching their fourth highest level since 1991. By contrast, the ifo export expectations show that the manufacturing industry is having problems coping with demand. In December, the balance fell to its lowest level since January. Fewer than one fifth of companies currently expect things to improve by March 2022. Despite problems due to the supply bottlenecks and the rising rate of infections, the general outlook for German foreign trade remains positive in view of the large order reserves.

THE SITUATION IN INDUSTRY IS STABILISING AND THE OUTLOOK IS CAUTIOUSLY OPTIMISTIC

Output in the manufacturing sector remained virtually constant in November compared with the previous month, falling slightly (-0.2%). Industrial output increased slightly (+0.2%), while construction output decreased by 0.8%.

The situation in industry seems to have stabilised in recent months. After its slowdown due to supply bottlenecks for key upstream goods and raw materials that started at the beginning of last year, industrial production recently rose again slightly in November (+0.2%) following significant growth of 3.1% in October. The important sector of automotives again reported positive growth in November (+4.1%), whereas the equally significant mechanical engineering sector saw a decline of 3.6%. Both industries have been suffering from a shortage of semiconductors for months.

New manufacturing orders rose by 3.7% month-on-month in November, following a 5.8% decline in October. Demand for capital goods saw the biggest growth, rising by 5.3%. Orders for intermediate and consumer goods increased by 1.2% and 3.8% respectively. Excluding large orders, order activity increased by 3.8%. New orders in the manufacturing sector as a whole recovered noticeably in November, following two sharp declines in August and October. This was mainly due to strong demand from the eurozone (+13.1%) and the non-euro zone (+5.0%). Domestic orders, however, dropped by 2.5%. The important industries of automotives and mechanical engineering received more orders (+7.0% and +2.0% respectively).

The mood in manufacturing companies improved in December for the first time in six months, reflecting more optimistic expectations. Nevertheless, industrial production is likely to continue to be hampered by supply bottlenecks for quite some time. More dynamic growth can only be expected again once these difficulties have been gradually overcome in the course of the year. In view of the current indicators of business sentiment and full order books, the outlook for development in industry can be considered to be cautiously optimistic.

RETAIL SALES UP AGAIN, BUT OUTLOOK REMAINS MODERATE

Retail sales (excluding vehicles) rose slightly, up 0.6% between October and November, following a 0.5% rise in October (revised upwards). This means that sales were most recently 5.9% above the level in February 2020, the month before the onset of the crisis. According to estimates by the German Federal Statistical Office, the retail sector in Germany achieved a new sales record overall in 2021, with sales expected to see a real increase of 0.9% compared with the previous record year of 2020. For November, retail sales of textiles, clothing, footwear and leather goods reported a 3.8% decline month-on-month, falling 6.2% below the pre-crisis figures reported for February 2020. Internet and mail order sales also reported a decline (-3.1%), but still exceeded pre-crisis levels by a substantial margin (+30.3%). New car registrations by private owners saw a considerable increase of 18.6% in November, after having already risen substantially in the preceding month (+6.2%).

The trend in consumer spending is being curbed by the pandemic and a high inflation rate. Looking ahead to the coming months, it must be borne in mind that consumers and traders are likely to be affected by uncertainty in view of the current development in infections and of rising prices. The ifo figures for business expectations in the retail sector worsened on balance again in December, falling for the sixth month in succession. This downturn is also indicated by the GfK consumer climate index. In December, the index fell into a negative territory and is to see a further sharp drop in January. In view of the increasing spread of the Omicron variant, the outlook for the start of 2022 is subdued.

The consumer price level increased by 0.5% in December compared with the previous month (November: -0.2%). However, the inflation rate, i.e. the year-on-year development of the price level, increased in December by 0.1 percentage points to 5.3%, its highest level since June 1992. The high rate is due in particular to significant increases in energy prices (+18.3%) and food prices (+6.0%). From January 2022, the base effect resulting from the temporary reduction in VAT rates ceased to have an impact, and future prices for crude oil point to some easing in energy prices. However, the continued shortage of intermediate goods such as semiconductors is likely to continue to drive prices upward. A gradual easing of the situation is not expected until later this year. The core inflation rate (excluding energy and food) increased by 0.4 percentage points to 3.7% in December compared with November, reaching its highest level since December 1993.

DEVELOPMENT ON THE LABOUR MARKET REMAINS POSITIVE

The recovery in the labour market continued through to the end of the year, but the level of uncertainty has increased here as well due to the Omicron variant. Unemployment and underemployment dropped further in December, down 23,000 each in seasonally adjusted terms. According to the unadjusted figures, unemployment rose slightly, up 12,000 to 2.33 million. Compared with the same month in the previous year, the number of unemployed persons was down by 378,000. The positive trend in gainful employment and jobs subject to social security contributions also continued. Gainful employment rose by 43,000 in November in seasonally adjusted terms. According to the unadjusted figures, there were 45.4 million people who were gainfully active, which is an increase of 403,000 year-on-year. In October, employment subject to social security contributions increased by 37,000 persons compared to the previous month. According to projections by the German Federal Employment Agency, short-time work decreased slightly in October, dropping to 0.7 million. The number of people in short-time work is expected to have remained steady in November. However, the number of short-time work notifications rose again in December, suggesting an increase in this month. Demand for labour continued to increase. The leading indicators published by ifo and the Institute for Employment Research (IAB) for December dropped noticeably: The spread of the Omicron variant could slow down the development on the labour market. It can be expected that most companies will to try to retain their employees.

RATE OF INSOLVENCIES CONTINUING TO FALL

From January to October 2021, the local courts recorded 11,738 corporate insolvencies. This is some 14% down on the previous year. Even though the flash indicator of the Federal Statistical Office pointed to a rise in the number of regular insolvencies by the end of 2021 (December: +18% month-on-month), the number of corporate insolvencies in the official statistics for the whole of 2021 is expected to have again been clearly below the previous year's level, reaching a new all-time low. Limited catch-up effects in the low four-digit range are expected for 2022, although the level of uncertainty about the future course of the pandemic has increased due to the new Omicron variant.

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[1] This report is based on data that were available as of 14 January 2022. Unless stated otherwise, these are rates of change against the respective preceding period on the basis of price-adjusted figures which have also been adjusted for calendar-day and seasonal variations.
[2] Press release by the Federal Statistical Office of 14 January 2022.