The economic situation in the Federal Republic of Germany in May 2023¹

• The underlying cyclical dynamism has recently weakened noticeably: the latest key indicators show substantial declines, only some of which are likely to have been a reaction to previous increases.
• After two months of positive development, industrial output fell back again in March. In March, new manufacturing orders registered their sharpest decline since the peak of the Covid-19 pandemic in April 2020. Business sentiment, however, brightened for the sixth month in succession.
• Retail turnover (excluding vehicles) fell again in March. Consumer sentiment is expected to continue to recover in the coming months, even though the persisting high rate of inflation remains an issue.
• The rate of inflation dropped to +7.2% in April. The main reason for this slight decline (March: +7.4%) was the diminishing of price pressures on foodstuffs, which were nonetheless much higher than they were a year before.
• The spring recovery of the labour market remains restrained for the time being. Registered unemployment rose somewhat in April in seasonally adjusted terms, though the Easter holidays also played a role here. According to the IAB Job Vacancy Survey, the demand for labour declined somewhat in the first quarter, but still remains at a high level. Gainful employment increased strongly in the first quarter.
• According to the official statistics, the figures for corporate insolvencies in January and February 2023 were around 20% higher than the respective monthly levels for the previous year. Current leading indicators point to a similar trend over the coming months, but currently, the situation is not expected to worsen.
• The current major fluctuations, susceptibility to revisions and the partially contradictory indicator data are not unusual for economic turning points. Following a slow winter season, indicators of sentiment suggest economic recovery over the course of the year.

WEAK END TO THE WINTER HALF-YEAR

The economy suffered a significant setback at the end of the winter half-year 2022/23. ‘Hard’ indicators such as new manufacturing orders and industrial output, which had recovered significantly at the beginning of the year, registered steep declines in March. There were also noticeable declines in production, especially in sectors that are macroeconomically important, such as mechanical engineering, motor vehicle production and energy-intensive industries. Activity in the construction industry, which had picked up significantly at the beginning of the year partly due to good weather conditions, also recently recorded a marked downturn.

The weak development of retail sales, which were also noticeably down in price-adjusted terms in March, reflects the development of consumer spending that continues to be subdued by the loss of purchasing power.

Momentum from foreign trade also waned substantially in March: there was a sharp decline in the exports of goods and services.

The mixed development recently observed in many economic indicators, with their sharp fluctuations and high susceptibility to revision, is not unusual for economic turning points, yet it does make interpreting the economic situation more difficult. The trends in sentiment indicators, such as the ifo Business Climate Index, the GfK Consumer Climate Survey and the S&P Purchasing Managers’ Index, continue to indicate economic recovery over the course of the year after a slow winter season.

GLOBAL ECONOMIC ENVIRONMENT REMAINS SUBDUED

While global industrial output grew again in the reporting month of February, compared to the previous month (+1.2%), world trade was weak (-0.9%). Container throughput in Europe’s ports (North range index) continued its downward trend in March. In contrast, activity in Chinese ports significantly increased. Overall, world trade continues to see weak growth.

New orders from abroad took a serious hit month-on-month, following a clear rise in February (+4.3%) with a decline of 13.3% in March. Orders from both the eurozone (-10.8%) and the non-eurozone (-14.8%) fell considerably. New orders are, however, fluctuating strongly from month to month; the more meaningful two-month comparison shows that they were only slightly down, by -0.2%.

According to the current forecast by Oxford Economics, the economic activity of Germany’s key trading partners – e.g. the eurozone (+0.8%) and the US (+0.5%) – will likely only increase moderately this year compared to 2022. In contrast, strong momentum for the global economy and German foreign trade is likely to come from emerging economies (+3.7%) and China in particular (+5.5%).

SETBACKS FOR EXPORTS AND IMPORTS

Following dynamic growth in February, the value of imports and exports fell substantially in the reporting month of March. There was a nominal decline of 4.3% in the exports of goods and services compared with the previous month; imports declined by as much as 6.2%. In the two-month comparison, however, which is less susceptible to fluctuation, nominal exports and imports continued to rise by +1.6% and +1.0% respectively. The weak development of foreign trade in March may be seen as a reaction to the sharp increases in February.

As in the preceding reporting months, foreign trade prices continued to fall. Export prices dropped slightly by -0-2% in March compared with the previous month, while import prices declined even more, falling by -1.1%. This means that in real terms, the decline in exports and imports in March is likely to be a little less pronounced than in nominal terms. As import prices again declined at a steeper rate compared to export prices, the terms of trade continued to improve in March (+0.8%).

The monthly trade surplus rose slightly in March in seasonally adjusted terms to €15.0 billion compared with the previous month. It averaged €14.1 billion in the first quarter of 2023, and was thus roughly twice as high as the annual average for 2022. In the wake of the COVID-19 pandemic and supply chain disruption, the trade surplus fell, after which price rises for energy had the largest impact.

The outlook for foreign trade is tending to brighten: the sentiment indicator of S&P Global increased to 54.2 points in April. It has thus been back above the growth threshold of 50 points since February 2023. Sentiment, however, primarily improved in the services sector; in industry it remained unchanged. The ifo export expectations also continued to increase in April. They recently stood at +6.9 balance points, their highest level since February 2022. Before the outbreak of the war against Ukraine, the index was significantly higher at around 15 balance points.

In recent months, material shortages in industry have eased further. In April, 39.2% of the companies surveyed by the ifo Institute reported shortages in the procurement of raw materials and intermediate products. In March, this figure was 41.6%. The Kiel Trade Indicator, which is based on vessel movement data, again reflects significant growth in (real) exports in April. In March, the Kiel Institute for the World Economy (IfW) indicator had revealed a decline in German exports – in line with the March figures on good exports that have now been published.

SLOWDOWN IN MARCH FOLLOWING UPTURN IN PREVIOUS MONTHS

After the quite positive development in both production and new manufacturing orders in the first two months of this year, March saw an unexpectedly pronounced slowdown. According to the Federal Statistical Office, output in the manufacturing sector decreased noticeably in March compared with the previous month (-3.4%). Output in industry declined by 3.3%, while construction was down by 4.6%. Output in the energy sector increased by 0.8%.

Most branches of industry saw declines in output: the important automotive and automotive parts sector in particular reported a sharp decline (-6.5%). The similarly large mechanical engineering sector also recorded a noticeable drop (-3.4%). Nearly all particularly energy-intensive sectors of the economy also reduced their output month-on-month: the manufacture of chemical products -2.0%, paper and cardboard -3.4%, metal production and processing -4.0%, and glass, glassware and ceramics -6.5%. Only coking and oil processing recorded a slight increase compared with the previous month (+1.5%).

New orders also decreased by 10.7% in March compared with the previous month. This was the largest decline since the peak of the Covid-19 pandemic in April 2020. Excluding major orders, the decrease is 7.7%. Overall, orders stood at 11.0% below the preceding year’s level. Demand from the non-eurozone in particular weakened compared with the previous month (-14.8%). Orders from the eurozone (-10.8%) and domestic demand (-6.8%) also declined noticeably.

In the first quarter as a whole, industrial production increased by 1.8% against the previous quarter, and new orders were flat (+0.1%). Business sentiment has recently improved further, which points to an economic recovery over the course of the year.

HIGH RATE OF INFLATION CONTINUES TO BE A BURDEN ON CONSUMER SPENDING

Retail sales (excluding motor vehicles) decreased again in March by 2.2% compared with the previous month. In the first quarter as a whole, there was a decline of 1.3% compared with the previous quarter. Compared with March 2022, the retail sector reported a real decline in sales of 8.1%, reflecting the high price increases to a considerable extent. Trade in foodstuffs recorded a month-on-month decline of 1.3% and a year-on-year decline of 10.6%. This is the sharpest year-on-year decline in sales since the beginning of the time series in 1994. This is likely due to food price inflation in March, which, at +22.3%, was again significantly higher than the overall inflation rate. Non-food retail sales decreased by 2.4% month-on-month (-1.4% down on the same month the year before). Online and mail-order trade recorded a fall of 4.8% in March (-2-0% down on the same month the year before).

The number of new registrations of passenger cars by private owners fell by 4.5% in April, after dropping by 8.2% in March. The reduced government funding for e-vehicles is likely to be reflected here.

Despite the decline in sales seen in almost all sectors in March, leading indicators for consumer sentiment point to recovery in the coming months. For example, the GfK Consumer Climate Survey rose for the sixth time in succession in April and renewed improvement is forecast for May. The positive trend in the ifo business expectations for the retail sector also continued in April. The main reason for the receding pessimism among consumers is likely to be the more moderate 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.

CONSUMER PRICE INCREASE ABATING

The inflation rate (price level increase compared to the same month of the previous year) amounted to 7.2% in April. The main reason for this renewed slight decline (March: +7.4%; February: +8.7%) was the diminishing of price pressures on foodstuffs, which continued to register a high year-on-year increase at +17.2% but a decline compared with March (-0.8%). Overall however, the rate for food price inflation remains at a level significantly above average.

Up +6.8%, energy prices saw a steeper rise in April compared with the same month of the previous year than was the case in March (+3.5%), but they were again below the change in the overall rate. This was partly due to a base effect: when the war against Ukraine began, there was a surge in energy prices, which, since March, have no longer featured in the year-on-year comparison. In addition, the measures of the third relief package have had a dampening effect. Despite this, the price of household energy increased considerably between April 2022 and April 2023 by +21.1%, almost as strongly as in March (+21.9%). Prices for natural gas rose by 33.8%, electricity by 15.4% and district heating by 12.3%. By contrast, prices for liquid fuels fell by more than a fifth (-21.8%).

The core inflation rate (excluding food and energy) remained at 5.8% in April following nine consecutive rises. In monthly terms, the prices increased at a similar rate as in March (April: +0.6%; March: +0.7%). The decline in momentum could indicate that the peak of the core rate has gradually been reached.

According to the breakdown of private consumption by consumption areas, food again made the biggest contribution to the consumer price increase (+1.8 percentage points), despite the recent easing of price pressure. 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 to 0.7 percentage points. The contribution from the transport sector was also more apparent again (+0.4 percentage points).

In monthly terms, consumer prices rose by 0.4% in April, only half as much as in March (+0.8%). Food prices, which fell for the first time since October 2021, had an impact here (-0.8%; vegetables: -7.5%; cooking fats/oils: -3.0%; butter: -3.6%). By contrast, energy prices rose again for the first time since January (+0.7%). The key factor was inflation in district heating (+3.3%) and motor fuel (+1.6%). In contrast, the prices for heating oil (-3.1%) and natural gas (-0.3%) fell.

Inflation rates are expected to continue to ease in the coming months, though they will still be at a high level. In its spring projection, the Federal Government expects an inflation rate of 5.9% in 2023 as a whole and 2.7% in 2024.

SPRING UPTURN ON THE LABOUR MARKET REMAINS SUBDUED

In April, registered unemployment increased by 24,000 persons compared to the previous month in seasonally adjusted terms. Excluding Ukrainian refugees, the increase amounted to 15,000 persons. The April figures for unemployment reflect both the period of economic weakness and the Easter holidays, during which fewer people took part in labour market schemes such as language and integration courses. Gainful employment increased strongly again in March by 56,000 persons (seasonally adjusted). Employment subject to social security contributions also increased significantly in February compared with the previous month (+46,000 persons in seasonally adjusted terms). The number of people on short-time work rose only slightly in February to around 160,000 persons. According to the indicators, however, this trend is declining. The leading indicators for April from the Institute for Labour Market Research (IAB) and ifo continue to point to an increase in employment and a downward trend in unemployment. According to the IAB Job Vacancy Survey, the number of vacancies fell in the first quarter, while the demand for labour remains at a high level of around 1.75 million job vacancies.

INSOLVENCIES ALSO AT AN ELEVATED LEVEL IN SPRING 2023

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. According to the final data provided by the Federal Statistical Office, the figures for January and February 2023 were each around 20% higher than in the preceding year.

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 declined by 14.1% in April 2023 compared with the previous month, following month-on-month increases of 10.8% and 13.2% respectively in February and March 2023. The number of insolvencies has been rising steadily since the second half of 2022, but the situation is not expected to worsen, for instance with a “wave of insolvencies” over the course of the year. 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 15 May 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.