The economic situation in Germany in June 2022¹

• The German economy has recovered from the shock of war and has stabilised for the time being. Industrial output recorded a slight increase again, but continues to be hampered by the implications of the war. The current high level of uncertainty has had an impact on new industrial orders which declined noticeably. Nevertheless, the mood in the business sector has brightened. Above all, the assessment of the current situation was significantly more optimistic, while expectations remained subdued.
• After rising in March, retail sales in April declined significantly compared with the previous month. Consumer sentiment is largely dampened due to the uncertainties caused by the war in Ukraine and the high inflation, which is unlikely to change anytime soon.
• From April to May, the inflation rate increased by 0.4 percentage points to 7.8%, a level last seen in the winter of 1973/74 during the first oil crisis. Prices for energy were the single biggest contributor to the high inflation rate, accounting for around 4 percentage points. Nearly 1 percentage point came from the rise in food prices. However, the core inflation rate, which excludes these two volatile price components, remained unchanged at 3.8%.
• The labour market continues to be stable, even if the current momentum is slowing down somewhat. Registered unemployment declined again in May in seasonally adjusted terms while employment (seasonally adjusted) showed a noticeable increase in April. At around 0.55 million people, the use of short-time work in March was significantly lower than in the previous month.

GERMAN ECONOMY PROVES ROBUST – OUTLOOK STILL INFLUENCED BY HIGH UNCERTAINTY
The German economy has stabilised for the time being after the Russian invasion of Ukraine. The first available indicators for the reporting month of April developed differently after the initial shock of the war in March. Industrial output showed a slight upward trend, and German foreign trade also recovered. Nevertheless, uncertainty has remained high since the start of the war. This was reflected above all by the drop in new orders in the manufacturing sector, but retail sales also fell again significantly. High inflation is eroding purchasing power and dampening consumer sentiment, even if the lifting of coronavirus-related restrictions for consumer-related services - in itself - had a positive effect. Survey-based sentiment indicators brightened in May, with the ifo Business Climate Index showing a marked increase. In particular, the assessment of the current situation improved. Expectations remained nearly unchanged.
The inflation rate increased again in May and, at 7.9%, is now at a level last seen in the winter of 1973/74 during the first oil crisis. It is still primarily energy prices that are driving general inflation, but food prices also increased noticeably in May. The outlook for further economic development thus continues to be dominated by high energy prices, although the recently introduced fuel rebate is expected to provide some relief in the summer months. However, the further development will continue to be influenced by the uncertainties surrounding the Russian war of aggression in Ukraine.

GLOBAL ECONOMIC DEVELOPMENT SUBDUED
The global economy continues to be affected by the war in Ukraine.
Global industrial production declined by -1.0% in March compared with the previous month. Global trade also decreased compared with February, albeit only slightly (-0.2%). The sentiment indicator by S&P Global (formerly IHS Markit) points to a slight recovery. It rose to 51.50 points in May and thus remained above the growth threshold of 50 points. The ifo export expectations were also slightly more optimistic than in the previous month. Due to China’s strict zero-Covid policy with its far-reaching closures of entire metropolitan areas, around 3% of the world’s container freight capacity is still stuck at the congested Port of Shanghai. Many pandemic-related restrictions in Shanghai were recently eased, but if China were to impose lockdowns of such magnitude again, this could (well) result in severe supply bottlenecks and a further slowdown in global trade.

GERMAN FOREIGN TRADE ON THE ROAD TO RECOVERY
German foreign trade recovered in April from the decline due to the war. Nominal exports of goods and services grew by a seasonally adjusted 3.2% in April compared with the previous month. Exports thus made up for part of the decline in March (-4.5%). In a two-month comparison, there was a slight increase of 0.3%. Export prices rose by 0.7% in April and are likely to dampen goods exports slightly in real terms.
Imports of goods and services also increased in nominal terms in April, amounting to 1.7% (adjusted for seasonal fluctuations). The two-month comparison shows a strong increase of 8.3%. With import prices rising again in April (+1.7%), real growth is likely to have been weaker.

The figures from the Federal Statistical Office for the month of April show that overall German foreign trade in goods recovered from the effect of the war in Ukraine. The sanctions and export restrictions imposed and the voluntary suspension of trade with Russia had contributed significantly to the slump in exports in the previous month. However, exports of goods to Russia fell by again significantly in April, dropping by 10.0%.
There is also a clear effect on imports of goods from Russia which slumped by 16.4%. In contrast to exports, imports from Russia had remained relatively stable in the previous month. Germany mainly imports energy commodities from Russia, such as oil and gas, and raw materials. Since these goods are exempted from the sanctions or subject to transitional periods, trade in these commodities continued for the time being. The sharp decline in imports from Russia indicates that the German economy is increasingly replacing imports from Russia and becoming less dependent on Russian commodities.
In April, the situation regarding imports from China has improved: Despite difficulties arising from the long lockdown and congested Port of Shanghai, imports from the People's Republic of China rose by 12.3%. By contrast, German exports to China fell by 4.5%. The number of container shipments from the Port of Shanghai, which was significantly reduced in April, has increased since mid-May and is now back at the the level reached the beginning of January. Despite the easing of restrictions in Shanghai at the end of May, bottlenecks may still occur in Germany with some delay.
Container data from IfW Kiel suggest that imports and exports are likely to remain relatively stable in May. The ifo export expectations also increased again in May (+4.5 balance points). The outlook for German foreign trade in the coming months is therefore more optimistic than in the previous month.

PRODUCTION IS GROWING – BUT REMAINS SUBDUED DUE TO THE WAR
In April, output in the manufacturing sector increased by 0.7% compared with the previous month. While industry increased its output only slightly (+0.3%), the energy sector saw a much bigger recovery from its slump in March (+16.1%). By contrast, production in the construction sector was curbed (-2.1%).
German industrial output is currently being dampened by the Russian war of aggression. First of all, Germany as an export-oriented country is disproportionately affected by the trade sanctions against Russia. Secondly, disrupted supply chains result in shortages of key intermediate goods. At the beginning of the war, the automotive sector struggled with shortages in cable harness deliveries but was able to increase production again by 6.8% in April after a very sharp decline in March. By contrast, the key sector of mechanical engineering reduced its output by 1.0%. In general, the high prices for electricity, gas and oil are making many production processes more expensive in the short term. In the energy-intensive sector ‘glass, glass products, ceramics, processing of stones and earths’, output declined by 3.1%. In the ‘metal production and metalworking’ sector, the growth of 2,3% was only partially able to make up for the losses from the previous month.
In addition to the increase in prices for energy and raw materials, the Russian war in Ukraine is now causing shortages of important inputs for industrial production processes. The outlook is currently influenced by great uncertainty.
Against this background, new orders in April fell by 2.7% compared with the previous month, declining for the third time in a row. Most recently, new orders (adjusted for work day fluctuations) were significantly lower than a year earlier (-6.2%). However, the order situation remains exceptionally good. The lower order volume was driven primarily by lower demand for capital goods (-4.3%), but also for consumer goods (-2.6%). However, orders for intermediate goods decreased only slightly (-0.3%). Geographically, there was a noticeable drop in demand from abroad of 4.0% (eurozone -5.6%, non-eurozone -3.0%). Domestic orders decreased by 0.9%. In the key industrial sector of automotives, orders declined by 8.6%. However, there were also individual sectors which saw growing order numbers, such as mechanical engineering (+3.8%), clothing (+7.7%) and electrical equipment (+1.3%). Sentiment in the manufacturing sector was much more upbeat in May compared with the previous month. Business expectations in particular were more optimistic, while the assessment of the current situation improved only slightly.

RETAIL SALES DECLINING AS PRICES CONTINUE TO RISE
Retail sales (excluding vehicles) fell by 5.4% month on month in April, following a minor increase (+0.9%) in March. Thus, they were 0.3% below their pre-year level. Although trade in textiles, clothing, footwear and leather goods experienced a month-on-month decline of 4.3%, it saw a high year-on-year increase of 123.4%. Internet and mail-order sales in April were up 5.4% on the previous month, but down 9.6% in year-on-year terms. There was an increase of 6.4% in new car registrations by private owners in May, following an 11.2% drop in the preceding month.
The mood among consumers is clouded which is mainly due to the Russian war of aggression in Ukraine and the continuing high inflation. Two frequently used leading indicators suggest a massive level of uncertainty among private consumers: The GfK consumer climate is likely to have brightened only slightly following its historic low in May. On balance, the ifo business expectations for the retail sector also increased only slightly in May from a very low level.
The level of consumer prices is expected to have increased by 0.9% in May month-on-month, thus rising for the sixth month in succession. Energy prices have recently risen again (+2.8%) after falling in April (-3.1%). Food prices increased noticeably in May (+2.1%; April: +3.6%). The inflation rate, i.e. the development of the price level within a year, increased noticeably by a further 0.4 percentage points to 7.9% in May, whereas it had still been below 5% at the beginning of the year. The last time the inflation rate was at a similarly high level was during the first oil crisis in the winter of 1973/1974. Energy prices in particular are driving inflation; they have risen sharply in the wake of the Russian war in Ukraine. In fact, about half of the price inflation can be put down to the rise in energy prices (approx. 4 percentage points) which increased by 38.3% year-on-year. For the reporting month of June, it is expected that the energy price increases will be dampened, which is in part a benefit of the fuel discount. The increase in food prices was also a major factor contributing to the high inflation rate (nearly 1 percentage point); the annual growth rate was 11.1%. However, the core inflation rate (excluding energy and food) was unchanged at 3.8% in May, although it had still been below 3% at the beginning of the year. Given the uncertainty over the war in Ukraine, the current inflationary pressure seems unlikely to ease anytime soon.

LABOUR MARKET REMAINS STABLE BUT MOMENTUM IS SLOWING DOWN SOMEWHAT
The labour market continues to be stable, though momentum is currently slowing down somewhat. In May, unemployment and underemployment fell slightly, declining by 4,000 and 5,000 persons respectively (in seasonally adjusted terms). As a result, the unemployment figures improved slightly. Since there was less growth in unemployment in the winter, the spring revival is now somewhat weaker. According to the unadjusted figures, registered unemployment dropped by 50,000 to some 2.26 million people. Compared with the same month in the previous year, the number of unemployed persons was down by 428,000. Also, the positive development in gainful employment and jobs subject to social security contributions continued. Gainful employment rose by 55,000 in April in seasonally adjusted terms. According to the unadjusted figures, there were 45.4 million people who were gainfully active, which is a year-on-year increase of 771,000. Employment subject to social security contributions also grew noticeably by 31,000 in March compared with the previous month. At around 550.000 million people, the use of short-time work in March was significantly lower than in the previous month. The number of notifications of short-time work dropped in May, indicating a continued downward trend. Most notifications come from the manufacturing sector again. In consumer-related services, short-time work is now playing only a minor role after the pandemic-related restrictions were lifted. Leading indicators suggest that the labour market will continue to develop favourably. Demand for labour remains at a high level. Nevertheless, there may be a slight increase in registered unemployment in June, most likely due to the migration of refugees in recent months.

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[1] This report uses data that was available through 10 June 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.