The economic situation in Germany in August 2022[1]

• The German economy proved resilient in the first half of the year. Despite the war in Ukraine and the resulting sharp rise in energy prices, economic output in the second quarter was unchanged from the previous quarter.
• Overall, the German economy performed better in the first half of the year than many observers had expected. However, the reduction in gas supplies since mid-June, the further rise in energy prices, the continuing supply bottlenecks and the increased overall uncertainty mean that the outlook for the second half of the year is significantly worse.
• In the reporting month of June, German industry continued to recover from the external shock suffered as a result of the Russian war of aggression against Ukraine. The production and export of goods increased. However, demand was weak as the business climate cooled. The outlook for the industrial economy in the second half of the year remains restrained as a result of the great uncertainty about the future.
• Within the space of a year, retail sales recorded their biggest decline since 1994 due to high price increases in real terms. Against a backdrop of sharp price increases in the retail sector, consumer confidence continued its downward slide.
• The inflation rate declined slightly from June to July for the second time in succession, falling to 7.5%. This represents a decrease of 0.1 percentage points compared with the previous month (June: +7.6%). The reduction in the energy tax on fuels, the nine-euro public transport ticket and, since July, the abolition of the EEG surcharge have slightly dampened inflation. The price of energy sources rose sharply again, but not as steeply as before. The rise in food prices hit a new post-reunification record.
• The labour market continued to be comparatively robust, although the migration of refugees from Ukraine again had a substantial impact on unemployment. The influx of refugees is also likely to lead to a further increase in registered unemployment in the coming months. At the same time, the number of job vacancies rose to an all-time high in the second quarter. The rising demand for personnel is affecting almost all industries. However, the biggest risk for the labour market would be if Russia cuts off its natural gas exports completely, which would be likely to lead to a decline in economic output and an increase in unemployment and short-time work.

• For May 2022, German district courts reported 1,242 corporate insolvencies filed, which is roughly the same number as in the previous month of April 2022. Overall, the number of corporate insolvencies filed in the first five months of 2022 was 4% lower than in the same period of the previous year. Current leading indicators and surveys suggest – despite the increased risks – that there will not be a significant increase in the near future.

THE GERMAN ECONOMY PROVED RESILIENT IN THE FIRST HALF OF THE YEAR - OUTLOOK STILL MARKED BY UNCERTAINTY
Business sentiment is currently still split in Germany. On the one hand, key indicators for the German economy developed positively in June. For example, industrial production and exports of goods increased while imports of goods remain at a high level. On the other hand, forward-looking indicators and business sentiment data such as new orders and the ifo Business Climate point to a deterioration in economic performance in the second half of the year. In particular, reduced gas supplies from Russia are weighing down on business sentiment, and any further cuts in Russian natural gas exports pose the main risk to economic development in the future.

The situation in global supply chains also remains tense, even though freight volumes from China have recently recovered. However, the supply bottlenecks are likely to persist in the second half of the year resulting in a subdued outlook for German foreign trade. The geopolitical uncertainty and high inflation had a negative impact on consumer confidence, which is why retail sales have recently been declining again. While the rate of inflation dropped again slightly to +7.5% in July, it 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 however providing some relief. The future development of the price level mainly depends on the continuation of energy supplies from Russia and the ECB’s response to the high rates of inflation.

Overall, however, the German economy has experienced a solid first half-year and proved to be quite resilient. According to new calculations by the Federal Statistical Office, gross domestic product was revised noticeably upward in the first quarter and experienced robust growth. This level was maintained in the second quarter. Some observers had expected a downward trend during this period. This means that economic development has been better than expected.

GLOBAL ECONOMY SLOWLY RECOVERING BUT OUTLOOK REMAINS CLOUDY
The global economy is starting to cope with the external shock of Russia’s war of aggression in Ukraine. Global industrial production increased by just 0.4% in May compared with the previous month, after being curbed in March and April (-1.0% and -2.3% respectively). In contrast, after stagnating in April (+0.0%), world trade in May (+2.5%) offset the decline seen in March (-1.2%). Still, global trade is being held back by the supply chain disruption. At present, vessels are 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.

The sentiment indicator of S&P Global (formerly IHS Markit) points to a slight recovery in the coming months. Although it fell quite significantly in July, from 53.5 to 50.8 points, it remained slightly above the growth threshold of 50 points. The ifo export expectations also deteriorated again compared with the previous month (-0.5 after +3.4 balance points). For the first time since March, the proportion of pessimistic companies outweighed those expecting the situation to improve in the coming months.

GERMAN FOREIGN TRADE: SHARP RISE IN EXPORTS – SLIGHT INCREASE IN IMPORTS
The increased level of energy prices is also affecting German foreign trade. Nominal exports of goods and services grew strongly in June, rising by 4.3% month-on-month in seasonally adjusted terms. In May, they had increased less sharply(+2.5%). This results in a significant increase of 8.8% for the second quarter of 2022. Export prices increased by 1.0% (seasonally adjusted) in June (Q2: +4.3%), which probably meant that the increase in exports slowed down (noticeably) in real terms. Broken down by countries of destination, there was an increase in both exports of goods to EU Member States (+3.9%) and to third countries such as the United States (+6.2%) and China (+2.4%).

By contrast, imports of goods and services increased slightly in June (+0.6%) compared with the previous month (in seasonally adjusted terms). In May, they had risen by 2.8%. The three-month comparison shows a sharp increase of 8.3%. Given a renewed rise in import prices in June (+1.2%; Q2: +6.2%), however, the recent development of imports was probably negative in real terms. Nominal imports of goods from the United States and China were lower than in the previous month (-6.6% and -3.9%, respectively), while imports from the EU increased slightly (+0.3%).

In view of the extraordinary dynamism in prices of fuel, Germany’s monthly current account surplus dropped to an exceptionally low figure of €16.2 billion in June. On average over the last few years, it was normal to have monthly current account surpluses of over €20 billion.

German exports of goods to Russia rose by 14.5% in June compared with May, adjusted for seasonal effects (May: +29.4%). However, the unadjusted figures show that the exports of goods were down by 40.3% in year-on-year terms. One reason for the month-on-month increase in German exports could be a rising demand in non-sanctioned goods such as pharmaceuticals. In March and April, there may still have been uncertainty about to which goods the sanctions would be applied.

After the slump in export cargo rates as a result of the lockdown and the port strike two weeks ago, cargo volumes from China are now recovering again. Nevertheless, global shipping remains unstable due to supply chain disruptions and capacity bottlenecks. Not least for this reason, ifo export expectations deteriorated again in July and are now negative again for the first time since March (from +3.4 to -0.5 balance points). At present, only around 12% 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 poor.

INDUSTRY CONTINUES TO RECOVER IN JUNE; HOWEVER, OUTLOOK REMAINS SUBDUED
Output in the manufacturing sector rose by 0.4% between May and June. Industrial output increased by 0.7%, whilst construction output fell (-0.8%). Output in the energy sector remained unchanged (0.0%).

The large sector of vehicles and vehicle parts registered a strong increase of 5.5%. The war-related slump in March has since been offset, and production is now back above its level at the beginning of the year. Developments in other branches of the industry varied: Output in the mechanical engineering sector increased slightly, up 0.4%. Industrial sectors like paper and cardboard (+2.2%) and foodstuffs and animal feed (+2.0%), some of which had reported marked declines in the previous month, also increased their output. By contrast, the manufacture of metal products (-2.1%) and chemical products (-0.7%) declined.

New manufacturing orders saw a month-on-month decline of 0.4% in June. In the previous four months, they had already fallen steadily as a result of the Russian war of aggression in Ukraine. Recently, there have been fewer large orders than average. Excluding large-scale orders, new orders rose by 0.4% against the previous month. Overall, the latest figures show the level of new orders, adjusted for workday fluctuations, at 9.0% below the level seen a year before.

The main reason for the month-on-month decline in June was a marked drop in demand for capital goods (-1.8%). The manufacturers of intermediate and consumer goods recorded growth rates of 1.2% and 1.7% respectively. Domestic orders picked up by +1.1%. Foreign demand declined by 1.4%, with orders from outside the eurozone falling considerably, down 4.3% (eurozone: +3.4%). The important areas of automotive/automotive parts and mechanical engineering both contracted slightly, with new orders falling by 0.1% and 0.4% respectively. Other vehicle manufacturing saw its output drop sharply, down 25.6%. However, growth was reported for the sectors of pharmaceutical products (+9.2%), chemical products (+1.1%) and electrical equipment (+0.6%).

In the month of June, industry as a whole continued to recover from the external shock it had suffered as a result of the Russian war of aggression against Ukraine. Against a backdrop of high energy prices and partially disrupted supply chains, it proved to be resilient. Due to its strong orientation towards exports, German industry is disproportionately affected by the trade sanctions against Russia. Demand is weak while the business climate has cooled. In view of the heightened uncertainty caused by the war and a looming gas shortage, the outlook for industrial activity in the second half of the year remains cautious.

RETAIL SALES DOWN SHARPLY YEAR-ON-YEAR
Retail sales (excluding vehicles) are likely to have fallen by 1.6% month-on-month in June, following a rise of +1.2% in May. Sales were thus 8.8% below the level reached in the previous year, the sharpest year-on-year decline since 1994, when the time series first started to be compiled. The main reason for this is the high increase in retail price levels. In nominal terms – i.e. unadjusted for prices – turnover fell by only 0.8% over the year. In June, trade in foodstuffs registered a fall in turnover of 0.6% in real terms compared with the preceding month (-7.2% down on the same month the year before), reaching its lowest level since June 2016. In addition to the sharp rise in prices, the strong 8.6% increase in sales in the catering sector may also have had a negative impact on food retailing. In the textiles, clothing, footwear and leather goods trade, the upward trend seen over the course of the year so far did not continue. Trade in these sectors declined significantly, falling by 5.4% (compared with -10.1% in the same month of the previous year). Growth of online and mail-order sales was also weak. In June, they recorded their sharpest month-on-month decline since 1994, falling by 3.8% (compared with. -15.1% in the same month of the previous year). As the reduction in fuel duty was introduced in June, the turnover of filling stations increased by 6.4% (previous year: -8.0%). New car registrations by private owners rose by a further 1.4% in July, after having grown substantially in the two previous months (June: +2.6%; May: +5.9%).

According to the two leading indicators, consumer sentiment continued to deteriorate due to the very sharp rises in prices for energy and foodstuffs. A new historic low is again forecast for the GfK Consumer Climate in August. The ifo figures for business expectations in the retail sector also continued to fall considerably in July. The balance of the figures reported is now at a very low level.

SLIGHT DROP IN INFLATION RATE
The level of consumer prices rose by 0.9% in July compared with the previous month, mainly due to a significant increase in the price of package tours (+15.2%). Food prices also rose again noticeably (+2.3%). Prices for energy, however, saw a slight decline (-0.3%).

The rate of inflation, i.e. the development of the price level over the year, dropped slightly for the second time in succession to 7.5% in July. This represents a decline of 0.1 percentage points compared with the previous month (June: +7.6%). In May, the rate reached +7.9%, its highest level since the winter of 1973/74 at the time of the first oil crisis. At the beginning of the year, however, it had still been below 5%. The high level of inflation continues to be driven by the very high inflation in energy products (+35.5%, June: 38.0%). Since June, the nine-euro public transport ticket and the fuel discount have had a small dampening effect on inflation. In addition, the EEG surcharge was abolished in July. The rise in food prices, however, hit a new post-reunification record, up 14.8% (June: +12.7%). Package tour prices again contributed strongly to driving up the inflation rate (+10.1%). The core inflation rate (excluding energy and foodstuffs) also remained stable in July, at +3.2%. Compared with overall inflation, this rate is rather low, but at the beginning of the year it had still been below 3%. In view of the continuing uncertainty surrounding Russian gas supplies, energy prices are expected to remain under strong pressure in the coming months and inflation rates are therefore expected to remain high for the foreseeable future.

LABOUR MARKET CURRENTLY STABLE, MIGRATION OF REFUGEES INCREASES UNEMPLOYMENT
The labour market continues to be comparatively robust, even though refugee migration from Ukraine is again having a significant impact on unemployment. Registered unemployment increased again strongly in July, rising by 48,000 persons in seasonally adjusted terms. The increase is due to the inclusion of Ukrainian refugees as recipients of social security benefits since June. According to the unadjusted figures, registered unemployment rose by 107,000 to 2.47 million people. However, compared with the same month in the previous year, the number of unemployed persons was down by 120,000. The positive development in gainful employment and jobs subject to social security contributions continued. Gainful employment rose by 24,000 in June in seasonally adjusted terms. According to the unadjusted figures, there were 45.6 million people who were gainfully active, which is a year-on-year increase of 610,000. There was a significant increase of 45,000 jobs requiring social insurance contributions in May. Approximately 0.33 million people were on short-time work in May, again substantially down on the month before. Notifications of short-time work also continued to fall. The number of vacancies in the entire second quarter rose to an all-time high. Almost all sectors reported rising demand for personnel. The latest leading indicators reveal a moderate trend. According to surveys, companies are more reluctant to create new jobs, yet demand for labour remains at a very high level. The migration of refugees is likely to keep driving up unemployment in the coming months, but its intensity will diminish. The biggest risk for the labour market would be if Russia cuts off its natural gas exports, which would be likely to lead to a decline in economic output and an increase in unemployment and short-time work.

STILL NO SIGNIFICANT INCREASE IN INSOLVENCIES
The downward trend in corporate insolvencies over the past two years continues, while the figures reported so far in 2022 remain below the previous year’s level. In the first five months of 2022, corporate insolvencies filed were around 4% lower in year-on-year terms.

According to preliminary data from the Federal Statistical Office, the number of regular insolvencies filed, a leading indicator of the future development in insolvencies, fell by 4.2% in July 2022 compared with the previous month. This represents a continuation of the decline already observed in June 2022 (-7.6% compared to May 2022). There is currently no sign of a significant increase in insolvencies. Nevertheless, the war in Ukraine and its implications are an additional risk for companies and it is difficult to assess its impact on future insolvencies over the course of the year. Due to the difficult economic environment, experts of the German Economic Institute (IW) in Halle expect the number of insolvencies for 2022 as a whole to be slightly higher than in the previous year.

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[1] The report is based on data that were available as of 11 August 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.