The economic situation in Germany in July 2022¹

• Despite the war in Ukraine, the Germany economy has experienced a solid first half-year. However, uncertainties about the continuation of Russian gas deliveries are significantly impacting the outlook for the second half of the year.
• In the reference month of May, German industry recovered to some extent from the external shock which it suffered due to Russia’s war of aggression against Ukraine. Output and new orders in the manufacturing sector stabilised. The high level of uncertainty due to the war and the risk of a far-reaching cessation of deliveries of Russian gas will however create major challenges for many firms.
• Turnover in the retail trade did see something of a recovery from the preceding month in May, following a clear downturn in April. But consumer sentiment continued to deteriorate against the backdrop of sharp rises in the level of retail prices.
• The rate of inflation dropped slightly between May and June, by 0.3 percentage points to 7.6%. The measures taken by the Federal Government like the reduction of tax on motor fuel and the nine-euro ticket for local public transport have reduced the inflationary push to some extent. The price of fuel sources rose sharply again, but not as steeply as before. The rise in food prices hit a new post-reunification record. The core inflation rate, which excludes these two volatile price components, dropped by 0.6 percentage points to 3.2%.
• The labour market showed the first clear effects of the war in Ukraine in June. Unemployment has risen, largely due to the influx of Ukrainian refugees. Further increases – diminishing in intensity – are to be expected in the coming months, but this does not reflect a weakness in the overall economy.
• The overall decline in business insolvencies seen in 2020/21 has continued in early 2022. The applications for corporate insolvency in the first quarter were 7.4% below the pre-year level; the April figure was down 6.4% on the year before. Current leading indicators and surveys suggest – despite the increased risks – that there will not be a significant increase in the near future.

GERMAN ECONOMY PROVING ROBUST – OUTLOOK CONTINUES TO BE DOMINATED BY UNCERTAINTY
Business sentiment is currently split in Germany. On the one hand, the actual situation of the companies is not as bad as one would expect given the war in Ukraine and the massive rise in energy prices. For example, production and new orders pointed slightly upwards in May, and retail turnover also picked up. The hotel, restaurant and catering industry is experiencing a positive start to the summer. Overall, there was a solid first half of the year, and just a few months ago many observers would have expected it to turn out much worse. On the other hand, the outlook for the second half of the year is relatively restrained: the major uncertainties about possible interruptions to the gas supply from Russia are depressing the mood. World trade is also continuing to suffer from the shock of the Russian war of aggression. As a result, German exports declined slightly in May. The massive rise in import prices significantly reduced Germany’s trade surplus.

The impending gas shortage is also reflected in the indicators of sentiment. The ifo business climate declined slightly in June, mainly due to a worsening of expectations. The energy-intensive chemical industry is particularly concerned about the uncertainty affecting gas supplies from Russia.

The rate of inflation dropped slightly to 7.6% in June, but is still up at a level seen in former West Germany during the first oil crisis in the winter of 1973/74. The general inflation rate continues to be driven by the prices of energy and food. The reduction in fuel duty and the nine-euro public transport ticket are providing some short-term relief. The future development of the price level depends on the continuation of energy supplies from Russia and the ECB’s response to the high rates of inflation.

GLOBAL ECONOMY AFFECTED BY WAR IN UKRAINE
The global economy needs to cope with the external shock of Russia’s war of aggression in Ukraine. For example, global industrial output dropped by 2.7% between March and April, following a decline of 1.0% in March. In contrast, world trade offset some of the decline seen in March (-0.9%) in April (+0.5%). The sentiment indicator of S&P Global (formerly IHS Markit) points to a slight recovery in the coming months. It rose to 51.5 points in May, above the growth threshold of 50 points. In contrast, the ifo export expectations deteriorated slightly from the previous month’s level. The outlook for German exporters is affected by the high level of uncertainty caused by war and a possible gas shortage. In addition, there is massive disruption to supply chains, not least due to China’s strict zero-COVID policy, with its far-reaching lockdowns of entire conurbations. There have now been far-reaching relaxations of the rules in Shanghai, but should further lockdowns on such a scale happen again in China, there is the possibility of worse supply shortages and a further slowdown in world trade.

GERMAN FOREIGN TRADE: HIGH ENERGY PRICES RESULT IN SHRINKING CURRENT ACCOUNT SURPLUS
The increased level of energy prices is also affecting German foreign trade. Nominal exports of goods and services practically stagnated in May, in seasonally adjusted terms, at a rate of change of 0.1% against the preceding month, following a sharp expansion of 3.6% in April. The two-month comparison still shows a rise of 1.4%. Export prices increased by 0.5% in May, which probably meant that exports declined in real terms. Trade in goods was affected by reduced exports to the eurozone (-2.6%), whilst exports to the United States (+5.7%) and China (+0.5%) increased.

Imports of goods and services rose again in May. In seasonally adjusted terms, imports rose by 2.2% (April: +0.9%). The two-month comparison shows a sharp increase of 4.5%. Given a renewed rise in import prices in May (+0.9%), however, the development of imports was probably weaker in real terms. Nominal imports of goods from China were lower than in the previous month (-1.6%), whilst imports from the United States (+9.7%) and the eurozone (+2.5%) rose substantially.

In view of the extraordinary dynamism in prices of fuel, Germany’s monthly current account surplus dropped to €7.3 billion in April. On average over the last few years, monthly current account surpluses of around €20 billion were normal.

German exports of goods to Russia rose by 29.4% from the previous month’s level in seasonally adjusted terms (April: -9.9%). This increase was primarily due to higher exports of pharmaceutical products not subject to the sanctions. However, the unadjusted figures show that the exports were down by nearly 55% in year-on-year terms. The value of German imports of goods from Russia dropped by 9.8% in May (April: -16.4%). Germany mainly imports energy commodities from Russia, such as oil and gas, and these were not subject to sanctions in the reference month of May. The fact that the imports from Russia have again seen such a sharp drop suggests that the German economy is increasingly substituting imports from Russia and is becoming less dependent.

In China, more than 3% of global freight capacity is currently stuck outside Shanghai and the neighbouring province of Zheijang. On the other hand, more vessels were able to leave the port of Shanghai, which might signify a slight pick-up in German-Chinese foreign trade.

At present, however, container vessels are also increasingly logjammed in the North Sea outside the ports of Germany, the Netherlands and Belgium. Roughly 2% of global freight capacity is currently stuck here. Not least against this backdrop, the ifo export expectations deteriorated slightly in June (from +4.4 to +3.7 balance points). At present, around 15% of companies are expecting things to improve in the next three months. Overall, the outlook for German foreign trade in the coming months is rather restrained.

SITUATION IN INDUSTRY STABILISING IN MAY
Output in the manufacturing sector rose by 0.2% between April and May. The industrial and construction sectors boosted their output by 0.6% and 0.4% respectively, whilst the energy sector cut its output by 5.8%.

Developments varied across the industrial sector. In the important area of cars and car parts, output rose appreciably, by 5.9%, and mechanical engineering and metal products also saw increases in production (+1.4% and +0.9% respectively). Other branches of industry like pharmaceutical products (-4.3%), chemical products (-2.7%), paper and cardboard (-2.5%) and foodstuffs and fodder (-2.2%) reported declines.

New orders in the manufacturing sector remained virtually flat in May (+0.1%). The three preceding months had seen some significant declines in the wake of the Russian war of aggression in Ukraine. The proportion of large-scale orders was above average in May. Excluding these, new orders declined by 0.9% against the previous month. Overall, latest figures show the level of new orders, adjusted for workday fluctuations, at 3.1% below the level seen a year before.

Demand for capital goods increased by 3.3% between April and May. In contrast, 3.2% less intermediate and 4.5% less consumer goods were ordered. In geographical terms, domestic demand was down 1.5%. 1.3% more orders were received from abroad (eurozone -2.4%, non-eurozone +3.7%). As was the case with industrial output, demand varied widely across the different branches of industry: here, again, the sector of cars and car parts recorded a sharp expansion, at +12.8%. Other areas like mechanical engineering and metal-working mainly registered more or less strong falls, whilst demand for chemical products held up well.

The outlook for the industrial sector in the coming months remains restrained due to the high level of uncertainty caused by the war and an impending interruption to supplies of gas from Russia.

RETAIL SALES INCREASE; INFLATION RATE SOMEWHAT LOWER
Retail sales (excluding vehicles) increased by 0.6% month on month in May, albeit following a clear decline of 5.4% in April. Thus, they were 3.6% below their pre-year level, according to the latest figures, largely due to the high increases in the retail price level. In nominal terms – i.e. unadjusted for prices – turnover rose by 4.1% over the year. The trade in foodstuffs registered a fall in turnover of 0.6% in real terms compared with the preceding month (-9.5% down on the same month the year before), whilst trade in textiles, clothing, shoes and leather goods achieved a clear increase of 10.6% (-9.5% down on the same month the year before). Internet and mail order business registered a fall in sales of 2.5% from the preceding month’s level (-14.4% down on the same month the year before). There was another increase, of 2.7%, in new car registrations by private owners in June (May: +6.0%).

Nevertheless, consumer sentiment continued to deteriorate due to the very sharp rises in prices for energy and foodstuffs. The two main leading indicators are suggestive of this: a new historic low is forecast for the GfK Consumer Climate in July. The ifo business expectations for the retail trade also worsened considerably on balance and reached a very low level following only a slight improvement in May.

The level of consumer prices rose by 0.1% between May and June. Unlike in the six months before, there was only a slight rise because the measures taken by the Federal Government like the reduction of tax on motor fuel and the nine-euro ticket for local public transport at least reduced the inflationary push. Most recent figures show a 0.6% rise in the cost of energy (previously: +2.8%) and 1.0% in the cost of foodstuffs (previously: +2.1%). The rate of inflation, i.e. the development of the price level over the year, dropped in June by 0.3 percentage points to 7.6%. At the beginning of the year, however, it had still been below 5%. The rise in prices of fuel was somewhat weaker due to the cut in fuel duty, but was still high, at +38.% (previously: 38.3%). The rise in food prices hit a new post-reunification record, at +12.7% (previously: +11.1%). Since Russia’s invasion of Ukraine, energy prices have risen significantly and are driving up inflation in Germany. Roughly half of the inflation is due to energy prices (around 4 percentage points). Foodstuffs also made a substantial contribution to the high inflation rate (nearly 1.1 percentage points). According to calculations by the Federal Statistical Office, the inflation rate stood in arithmetical terms, excluding relief measures and given unchanged prices for fuel and public transport, at +8.6%. The core inflation rate (excluding energy and foodstuffs) dropped by 0.6 percentage points to +3.2% in June, but it had been below 3% at the beginning of the year. In view of the impending interruption to supplies of Russian gas, the coming months can be expected to see continuing high price pressure on energy despite relief provided by the state such as the reduction of the EEG surcharge to zero. Persistent high inflation rates can therefore be anticipated for the foreseeable future.

UNEMPLOYMENT BOOSTED BY MIGRATION OF REFUGEES FROM UKRAINE
The labour market is for the first time registering clear effects of the Russian invasion of Ukraine, the reason being the migration of refugees triggered by the attack. Registered unemployment rose sharply in seasonally adjusted terms by 133,000 persons, largely due to Ukrainian refugees. Also, the untypically low rise in seasonal unemployment last winter and the small number of labour-policy measures are increasing the level.

According to the unadjusted figures, registered unemployment rose by 103,000 to 2.36 million people. Nevertheless, compared with the same month in the previous year, the number of unemployed persons was down by 251,000. The positive development in gainful employment and jobs subject to social security contributions continued. Gainful employment rose by 35,000 in May in seasonally adjusted terms. According to the unadjusted figures, there were 45.5 million people who were gainfully active, which is a year-on-year increase of 772,000. In April, employment subject to social security contributions increased by 11,000 persons compared to the previous month. Approximately 0.4 million people were on short-time work in April, well down on the month before. Notifications of short-time work also continued to fall. Most recent leading indicators were slightly down, but demand for labour remains at a high level. This means that the current rise in unemployment as a result of the Russian war of aggression does not reflect a weakness in the overall economy, but is due almost entirely to the migratory movements triggered by the war. These movements are likely to result in further rises in unemployment in the coming months, but their intensity will diminish.

STILL NO INCREASE IN INSOLVENCIES
Having decreased in the past two years, the number of business insolvencies at the beginning of 2022 remains below its pre-year level. The applications for corporate insolvency in the first quarter of 2022 were 7.4% below the pre-year level. In April, the number of applications for corporate insolvencies was down 7.4% on the previous year’s figure.

The rise in regular insolvencies of 8.4% between April and May, a leading indicator of the future development in insolvencies, did not continue in June (-7.6% against May). However, the consequences of the war in Ukraine do represent an additional risk for companies. It is not possible to estimate at present how dynamic the rate of insolvencies will be in the course of the year.
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[1] The report is based on statistical data that were available as of 13 July 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.