The economic situation in Germany in April 2023¹

• Current economic indicators point to a noticeable upturn in value added in the first quarter of 2023: output in the industrial and building sectors showed a clear upward trend as a result of the further easing of shortages of materials, the significant decline in energy prices and favourable weather conditions.
• Overall, GDP is likely to have risen slightly compared with the previous quarter, thus avoiding a ‘technical recession’. Current forecasts by the German Council of Economic Experts and the joint diagnosis of economic research institutes also predict slightly positive GDP growth for the year as a whole.
• The industrial sector was on the path towards recovery in the first quarter. Both production in the manufacturing sector and new manufacturing orders increased significantly in January and February. The business outlook brightened and fewer companies reported shortages of materials.
• Retail sales (excluding motor vehicles) decreased again in February, after having fallen noticeably in December despite Christmas sales and having remained fairly steady in January. Consumer sentiment is expected to continue its recovery in the coming months, although inflation-related losses in purchasing power continue to weigh on the economy.
• The inflation rate declined to +7.4% in March. A base effect played a major role here. At present, food is the biggest price driver, not only because of its high weight in the basket of goods, but also because food inflation is now higher than that of energy prices.
• The labour market showed robust flat movement in the month of March. The typical spring upturn, however, was comparatively weak. Registered unemployment increased in March in seasonally adjusted terms, but employment also increased strongly. Demand for labour remains at a high level.

FAVOURABLE START TO 2023

The economic situation in the first quarter of 2023 is better than assumed at the turn of the year: the mild winter and high gas storage levels contributed to sufficient gas availability in Germany and Europe, which is also reflected in a noticeable drop in energy prices. World market prices for gas, for example, are back at the level they were before Russia’s invasion of Ukraine. Thus, the peak of the consumer price increase has probably passed. Industrial output has recently picked up significantly, benefitting from an easing of supply chain and material bottlenecks, and the moderate global recovery. Production in energy-intensive industries has recently been trending upwards again, after it had been cut back considerably in the second half of 2022 due to the increase in the prices of gas and electricity. The construction sector benefitted from the mostly mild winter weather and worked off the order backlog.

Current economic and leading indicators point to slightly positive GDP growth in the first quarter. This is also confirmed by the spring forecast of the German Council of Economic Experts and by the joint diagnosis of the major economic research institutes, both of which suggest slightly positive GDP growth at the beginning of the year. It appears that a ‘technical recession’ in two successive negative quarters has been averted, and current forecasts also predict a slight year-on-year increase in GDP for 2023 as a whole.

Nevertheless, there are significant burdens and risks for further economic development, particularly the development of private consumer spending which is currently still very weak. The problems affecting the economy also include worsening conditions in the construction industry, recent problems in individual financial institutions and also geopolitical uncertainties in connection with the war against Ukraine.

GLOBAL ECONOMY RECOVERING SLOWLY

World trade (-0.1%) and global industrial output (0.0%) stagnated in the month of January. There are, however, signs of an upward trend after the weak previous months. New orders from abroad showed a clear upward trend in January (+4.9%) and February (+4.2%). In its latest forecast of 11 April, the IMF expects the global economy to grow by 2.8% in 2023. The major developed economies will grow more slowly (+1.3%) than the emerging and developing countries, whose economic output is expected to increase at an average rate of 3.9%. China (+5.2%) and India (+5.9%) in particular are expected to provide significant growth impetus for the global economy this year.

STRONG RECOVERY OF EXPORTS AND IMPORTS

The value of exports and imports increased significantly in the month of February. Compared with the previous month, exports increased by 3.1% in nominal terms and imports by as much as 4.9%. This is a surprising development given that current indicators such as the Nordrange Index, (i.e. data on container throughput in Northern European ports), and the Kiel Trade Indicator, (i.e. vessel draft and position data), had suggested a weakening of foreign trade in February.

The current price development reflects the gradual decrease in the global prices of energy and raw materials and the continued easing of supply chain bottlenecks. Export prices dropped slightly by -0.3% in February compared with the previous month. Import prices, however, were significantly down by -2.4%. This means that in real terms, the increase in exports and imports in February is likely to be even more pronounced than in nominal terms. As import prices fell more sharply than export prices, the terms of trade of the German economy improved slightly again.

The outlook for foreign trade has brightened somewhat. The sentiment indicator of S&P Global increased to 53.4 points in March. It has thus been above the growth threshold of 50 points again for two months, with the brightening of sentiment mainly coming from the services sector. The ifo export expectations also increased slightly in March. They now stand at +4.0 balance points. Before the outbreak of the war against Ukraine, however, the index was still at around 15 balance points. Following the trend of recent months, material shortages in industry have eased further. According to the survey conducted by the ifo Institute in March, for example, only 41.6% of companies said they were still affected by shortages of intermediate products. In the previous month, this figure was 45.4%.

One year after Russia’s invasion of Ukraine, Germany’s foreign trade data also shows that the interdependence of the German and Russian economies is being progressively dismantled. Exports to Russia in February 2023 were down 60.5% on the level seen a year prior, mainly due to the large number of goods-related sanctions. Imports from Russia were down by as much as 91.0% in the same period. This figure reflects the very advanced efforts to achieve energy independence.

ROBUST INDUSTRIAL ACTIVITY IN THE FIRST QUARTER

Both industrial output and new industrial orders were on the road to recovery in the first quarter. According to the Federal Statistical Office, output in the manufacturing sector increased noticeably in February compared with the previous month (+2.0%). Output in industry increased by 2.4%, while construction grew by 1.5%. Output in the energy and water supply sector was down (-1.1%).

In terms of the respective sectors of the economy, the important area of vehicles and vehicle parts in particular expanded strongly (+7.6%). By contrast, the similarly large mechanical engineering sector stagnated (-0.2%). The development was upwards in almost all of the particularly energy-intensive sectors of the economy. The manufacture of chemical products (+3.2%) grew strongly again, as did coking and oil processing (+6.7%). The metal production and processing sector increased its output by 1.7%, while paper and cardboard stagnated at +0.1%. Only glass production was down, by -0.8%.

New orders also rose strongly by 4.8% in February compared with the previous month. This increase represents the third consecutive increase and the highest since June 2021. Excluding large-scale orders, the increase was 1.2%. However, orders were recently still 5.7% below the level one year earlier. In monthly terms, domestic demand increased strongly (+5.6%). Orders from the eurozone also recovered from their decline at the beginning of the year (+8.9%), while orders from the non-eurozone rose only slightly (+1.4%) after increasing sharply in January.

The increases in industrial output and new orders in the manufacturing sector in February indicate robust industrial activity in the first quarter. According to surveys, the business outlook for companies has brightened further recently. On top of this, there are plenty of orders on the books and the supply bottlenecks that are gradually easing. The fact that manufacturing in energy-intensive industries also expanded noticeably indicates that the energy crisis has bottomed out. Overall, there are signs of an economic recovery at the beginning of 2023 following the weak final quarter of 2022.

LOSSES IN PURCHASING POWER CONTINUE TO WEIGH ON PRIVATE CONSUMPTION

Retail sales excluding motor vehicles decreased by 0.4% in February, following weak Christmas sales in December (-1.6%) and a slight increase in January (+0.2%). Compared with February 2022, the retail sector reported a (real) decline in sales of 7.0%, reflecting the high price increases to a considerable extent. Compared to pre-Covid levels in February 2020, sales were also lower (-0.5%).

Trade in foodstuffs recorded a slight month-on-month increase in sales of 0.3% in February (-7.4% down on the same month the year before). Non-food retail sales decreased by 0.3% month-on-month (-6.8% down on the same month the year before). Online and mail-order trade recorded an increase of 4.1% in February (-8.9% down on the same month the year before). However, sales were still 15.0% higher than in February 2020 before the outbreak of the COVID-19 pandemic.

The number of new registrations of passenger cars by private owners fell by 17.4% in March, after stabilising again in February (+15.5%) and dropping sharply by 39.8% in January. At the end of last year, subsidies for e-cars and passenger cars with hybrid drive systems (‘environmental bonus’) were reduced or expired, which is why new registrations in November and December increased noticeably by 14.6% and 21.5% respectively.

The two main leading indicators of consumer sentiment point to a further recovery in the coming months, albeit with declining momentum. For example, the GfK Consumer Climate Survey rose for the fifth time in succession in March and a further – but only slight – improvement is forecast for April. The positive trend in the ifo business expectations for the retail sector also continued in March, albeit with less momentum than before. The main reason for the receding pessimism among consumers is likely to be the lower prices for energy on the markets, but the stabilisation measures adopted by the Federal Government certainly also helped to reduce the uncertainty among private consumers.

INFLATION RATE RECENTLY IN CLEAR DECLINE

The inflation rate decreased noticeably by 1.3 percentage points to +7.4% in March. A base effect was the main reason for the marked decline. Since the beginning of the war against Ukraine in March 2022, the inflation rate rose sharply as a result of the surge in energy prices. This increase will no longer feature in the year-on-year comparison. In addition, the measures of the third relief package have had a positive effect. Compared with the previous year, food price inflation gained further momentum (22.3%; Feb.: +21.8%; Jan.: +20.2%) and is now well above the inflation rate for energy (+3.5%; Feb.: +19.1%; Jan.: +23.1%). Since January 2023, the increase (in energy prices) has partly been limited by the price cap which was implemented with retroactive effect. Despite this, the price of household energy increased considerably in March 2023 compared to the previous year, by 21.9% (Feb.: +32.2%). Prices for natural gas rose by +39.5%, electricity by +17.1% and district heating by +16.4%. By contrast, prices of liquid fuels fell by more than a third (-35.7%). The core inflation rate (excluding food and energy) increased again in March to +5.8% (Feb.: +5.7%). In a month-on-month comparison, the core rate increased noticeably again (+0.7%). This shows that the price pressure is broadening.

Compared with the previous month, consumer prices in March rose by 0.8%. At +1.3%, food prices in particular continued to rise appreciably, albeit not as strongly as in February (+2.4%). Energy prices continued to stagnate (±0.0%). Increases in the prices of district heating (+1.2%) and natural gas (+0.7%) offset declines in the prices of fuel oil (-2.3%) and electricity (-0.6%). Overall, fuel prices remained virtually stable (-0.1%; premium petrol: +0.3%, diesel fuel: -1.6%).

According to the latest breakdown of private consumption by consumption areas, food again made the biggest contribution to the inflation rise (+2.5 percentage points). The contribution of housing costs to inflation remains high (+1.7 percentage points, including +0.4 percentage points from electricity and +0.2 percentage points from gas). The contribution to price inflation from the areas of leisure, recreation and culture increased significantly by 0.8 percentage points, whereas the transport sector as a whole did not contribute to price inflation (±0.0 percentage points).

Inflation rates are expected to continue to ease in the coming months, even though they will still be at a high level. The current range of forecasts is 5.4% to 6.6% for 2023 and 2.1% to 3.5% for 2024. According to the Joint Economic Forecast and the German Council of Economic Experts, there are, however, no indications of a wage-price spiral.

SPRING RECOVERY ON THE LABOUR MARKET WEAKER THAN IN PREVIOUS YEARS

Demand on the labour market continued to be high in March, although the typical spring upturn was comparatively weak. The increase in registered unemployment in March amounted to 16,000 persons in seasonally adjusted terms. Excluding Ukrainian refugees, the increase amounted to 10,000 persons. Employment increased by 31,000 persons (seasonally adjusted) in February. Employment subject to social security contributions also increased in January (+34,000 persons in seasonally adjusted terms). The number of people on short-time work fell to around 140,000 in January. The use of short-time work has been declining since November. The leading indicators from the Institute for Labour Market Research (IAB) and ifo remained stable in March and pointed to a slight increase in employment and a downward trend in unemployment. Although labour demand fell slightly recently, it is still at a high level: according to the IAB Job Vacancy Survey, job vacancies reached a new high of almost 2 million in the fourth quarter of 2022. The unemployment figures for March primarily reflect the weak growth at the end of 2022. Unemployment increased primarily in the consumer-related sectors of the economy, and rose less in the energy-intensive sectors.

CORPORATE INSOLVENCIES RISING FOR THE FIRST TIME SINCE THE FINANCIAL CRISIS

According to the official insolvency statistics, in 2022 as a whole, corporate insolvencies increased by 4.3% year-on-year, amounting to a total of 14,590. This was the first year-on-year increase in corporate insolvencies since the financial crisis in 2009, albeit from a historically low level (2021: 13,993) since the introduction of the Insolvency Code in 1999. The highest number of corporate insolvencies in 2022 occurred in the construction sector, with 2,698 insolvency cases (2021: 2,423; +11.3 %). This was followed by the trade sector (including maintenance and repair of motor vehicles), with 2,239 insolvency procedures (2021: 2,122; +5.5 %).

As a leading indicator, the number of regular insolvencies filed gives an indication of the future development of corporate insolvencies. According to preliminary data from the Federal Statistical Office, these rose by 11% in February compared with the previous month, following a decline at the start of the year (January: -3.2% month-on-month). An increase in corporate insolvencies is expected over the course of the year, albeit from a very low level by long-term standards. The implications of the war against Ukraine and the temporary sharp rise in energy prices are a major burden for many companies, and it is difficult to assess their impact in terms of future insolvencies in the coming months.

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¹This report is based on data that was available as of 10 April 2023. 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.