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After two consecutive quarters of negative growth in the winter half-year 2022/23, current economic indicators suggest a sluggish start to the second quarter. According to the common definition, it can be said that the German economy was in a "technical recession". The higher energy prices, the weak global economy and less favourable financing conditions are still impacting the economy and delaying the expected economic recovery.
The underlying cyclical dynamism of the economy has weakened. Industrial output remained virtually unchanged in April after falling sharply by -2.0 per cent in March. New orders fell slightly in April (-0.4 per cent), following a sharp drop in the previous month (-10.9 per cent).
Following a noticeable decline in retail sales (excluding motor vehicles) in March, retail trade recovered somewhat in April. Consumer sentiment continued to brighten, but only slightly. Overall, consumer sentiment was still at a very low level because high inflation continues to weigh on household spending.
The upward trend in consumer prices weakened further in May, with the inflation rate standing at 6.1 per cent. The rate of core inflation also declined slightly to 5.4 per cent. It is expected that there will be base effects in the further course of the year as a result of the relief measures taken a year ago to curb price increases. These are likely to temporarily reinforce upward pressure on prices.
On the labour market, the economic slowdown led to a loss of momentum in the winter half-year. Registered unemployment continued to rise slightly.
Looking ahead, falling prices on the global energy markets, slowing inflation, higher wage agreements and the expected global economic recovery all point to a moderate recovery of the German economy in the remaining course of the year.
SUBDUED START TO THE SECOND QUARTER
The German economy continues to be in troubled waters in early summer. Real value added increased by 0.9 per cent in the first quarter compared with the previous quarter. According to the detailed report by the Federal Statistical Office of 25 May, however, gross domestic product in the first quarter was 0.3 per cent below the previous quarter's level after price, seasonal and calendar adjustments. Together with the previous decline in the fourth quarter of 2022, this meets the definition of a "technical" recession. In addition to the further decrease in real consumer spending (-1.2 per cent) and government spending (-4.9 per cent), this was also due to special developments resulting from the extensive government stabilisation and support measures, which dampened GDP growth in arithmetical terms. However, there are currently no signs of an "economic" recession in the sense of a prolonged, deep slump in economic output combined with capacity underutilisation, reduced investment, declining employment and rising unemployment. On the contrary, according to the ifo Institute, capacity utilisation in the manufacturing sector was above the long-term average in the first quarter, employment increased by 0.3 per cent quarter-on-quarter, and investment activity rose strongly by 3.0 per cent after price, seasonal, and calendar adjustment.
Nevertheless, current economic indicators do not yet point to a noticeable recovery in the second quarter. Following the slump in March, new manufacturing orders fell again in April. However, large orders recently also influenced the monthly trend. Output in the goods-producing sector increased slightly in April, while output in the construction sector rose quite significantly. Overall, however, the significant decline in the previous month could not be offset. Sentiment indicators such as the ifo Business Climate Index have also recently been pointing to a less positive economic situation and outlook for the economy. The expected economic recovery in Germany thus appears to be further delayed.
Nevertheless, against the background of falling prices on the global energy markets, continued slowing inflation, higher wage settlements and an expected global economic recovery, a moderate economic recovery is expected for the German economy in the further course of the year.
WORLD TRADE STILL SLUGGISH
While global industrial production stagnated in March compared with the previous month (-0.1 per cent), world trade recently increased again somewhat (+1.5 per cent). Global container throughput (RWI/ISL Container Throughput Index) in April signalled a moderate upturn in world trade (seasonally adjusted), mainly due to the significant expansion of throughput at Chinese ports. There are also signs that Europe’s economy is stabilising. The North Range Index increased to 96.4 points compared to March 2023, but the trend component still points downward. According to ship movement data from the Kiel Trade Indicator, global trade is likely to be flat in May.
In its current forecast of June 2023, the OECD expects a modest recovery in global economic activity. Accordingly, the global economy is expected to grow by 2.7 per cent this year and by 2.9 per cent next year. While economic activity in the eurozone (+0.9 per cent) and the USA (+1.6 per cent) is likely to grow only slowly, the OECD expects the emerging economies to provide more significant impetus for the global economy (esp. China: +5.4 per cent, India: +6.0 per cent).
RESTRAINED STIMULUS FROM FOREIGN TRADE
Following the significant decline in March (-4.4 per cent), nominal exports of goods and services increased again somewhat in April, rising by 0.7 per cent compared with the previous month. Nevertheless, they were 1.3 per cent below the previous quarter’s average at the start of the second quarter. According to initial estimates, deliveries to major emerging markets (Brazil, Mexico, India) declined recently, but exports to the EU increased again. Nominal imports of goods and services continued to decline in April, down -0.6 per cent from the figure in March 2023 and -2.0 per cent from the average in the first quarter. Imports of goods from Russia fell by a further 8.8 per cent. In year-on-year terms, the decline amounts to nearly 90 per cent.
As exports and imports developed in opposite directions, the monthly trade surplus recently increased again from €12.1 billion in March to €14.2 billion in April.
The trend in foreign trade prices continues to reflect the decline in the prices for energy and raw materials and the easing of supply chain bottlenecks and shortages of materials. The terms of trade improved again in April, up 1.3 per cent from the previous month, since prices of imports fell more strongly (-1.7 per cent) than prices of exports (-0.4 per cent). In real terms, the increase in exports in April is therefore likely to have been somewhat stronger and imports are also expected to have seen a slight increase in real terms.
The leading indicators are currently giving restrained positive signals for foreign trade. The sentiment indicator of S&P Global has been above the 50-point growth threshold since February and reached a value of 54.4 in May. However, impetus for growth only came from the service sector. The mood in industry has not improved recently, with the index remaining at 49.6 points since March. The easing of supply chains will also likely have a supportive impact here. In April, only 35.3 per cent of the industrial companies surveyed by the ifo Institute reported shortages of materials, down from 39.2 per cent in March.
By contrast, the number of new orders from abroad fell by a further 1.8 per cent month-on-month in April following the sharp decline seen in March (-13.1 per cent). Orders from both the eurozone (-2.7 per cent) and the non-eurozone (-1.1 per cent) fell considerably. Even in the three-month comparison, which is less influenced by fluctuations, orders from abroad were down (-2.3 per cent).
With a balance of +1.8 points, the ifo export expectations fell somewhat again in May, after having risen for two months in succession. Provided that export expectations do not decline further in June, however, the trend still points to a modest increase in exports in the second quarter. Ship movement data from the Kiel Trade Indicator suggest a moderate month-on-month increase for (real) German exports in May.
PRODUCTION STABILISES AFTER PERIOD OF WEAKNESS
According to the Federal Statistical Office, output in the manufacturing sector rose by 0.3 per cent in April compared with the previous month, after falling significantly in March (revised upwards from -3.4 per cent to -2.1 per cent). Output in industry remained virtually unchanged in April (+0.1 per cent), while construction saw an increase of 2.0 per cent. The energy sector reported a decline of 1.5 per cent.
Economic development in the industrial sectors varied. Manufacturers of pharmaceutical products increased their output sharply, by 6.4%. By contrast, the two major industrial sectors, motor vehicles and parts and machinery, recorded significant declines of 0.8 per cent and 0.5 per cent respectively. Most of the particularly energy-intensive sectors of the economy also cut their output month-on-month. Manufacture of chemicals -1.4 per cent, coking and oil processing -3.2 per cent, glass, glassware and ceramics -2.4 per cent, and paper and cardboard -0.5 per cent. Metal production and processing and metal products saw an increase in output month-on-month (+1.2% and +0.2%, respectively).
New orders in the manufacturing sector fell only slightly by 0.4 per cent in April compared with the previous month. Following the sharp decline in March (-10.9 per cent), they remained weak at the start of the second quarter. However, the month-on-month comparison is currently very much influenced by fluctuations in large orders; excluding large orders, the increase in April was 1.4%. Germany’s export-oriented economy is particularly affected by the weak performance of the global economy and the decline in orders from the eurozone (-2.7 per cent). Domestic demand, however, is comparatively stable (+1.6 per cent).
The underlying economic momentum in industry has weakened noticeably. The leading indicators point to some stabilisation of the economy in April following significant declines in March. The major fluctuations, susceptibility to revisions and the partially contradictory indicator data are not unusual for economic turning points. Overall, the economic recovery in industry is expected to initially remain subdued.
RETAIL SALES INCREASE SLIGHTLY AGAIN
Retail turnover (excluding vehicles) increased 0.5 per cent in April from the previous month, following a 1.0 per cent decline in March. Compared with April 2022, the retail sector reported a real decline in sales of 4.5%, reflecting the high price increases to a considerable extent. In April, trade in foodstuffs registered an increase in turnover of 0.5 per cent compared with the preceding month, but was down -4.4 per cent on the same month the year before. In year-on-year terms, this means that food retail turnover has been declining for 22 months in a row. Although food prices fell by 0.8 per cent in April compared with the previous month (May: -0.3 per cent), the year-on-year increase was still very high, reaching +17.2 per cent (May: +14.9 per cent). Food remains the strongest driver of consumer prices. Online and mail-order sales recorded an increase of 5.6 per cent in April (compared with -7.2 per cent in the same month of the previous year).
The number of new registrations of passenger cars by private owners saw growth of 3.1 per cent in May, after falling 8.2 per cent in March and April. This development is likely to continue to be influenced by the reduced government funding provided for e-vehicles.
The leading indicators of consumer sentiment are sending out ambiguous signals: While the GfK consumer climate rose for the eighth time in succession in May and is expected to improve further in June, there will only be a small increase from a very low level. The recovery of the GfK Consumer Climate was interrupted by the energy price crisis and has not yet returned to the pre-Covid level. The ifo business expectations for the retail sector declined in May. With inflation remaining high, consumer sentiment is still fairly low even though the expected rise in wages and salaries should at least partly offset the price increases.
RISE IN CONSUMER PRICES CONTINUES TO SLOW DOWN
The rate of inflation, i.e. the rise in the price level within the space of a year, decreased noticeably in May to 6.1 per cent (April: +7.2 per cent, March: +7.4 per cent). Food prices again rose disproportionately compared with the same month a year ago (May: +14.9 per cent), although upward pressure on prices continued to ease (April: +17.2 per cent, March: +22.3 per cent). Energy prices rose by only 2.6 per cent in May compared with the same month a year earlier, significantly less than the overall index. This is because energy prices on the world markets have declined significantly and the high energy price increases resulting from Russia’s attack on Ukraine have not been a factor in the year-on-year comparison since March (base effect). In addition, the measures of the third relief package have had a dampening effect. The core rate (excluding energy and food) also declined somewhat (May: +5.4 per cent year-on-year, April: +5.8 per cent).
Price pressure from energy sources has decreased further. Prices for natural gas fell sharply again on the spot markets. At currently around €30/MWh, the TTF base load is back at pre-crisis levels. After peaks of over €300/MWh in August, the relatively high gas storage levels contributed to this, thanks to the consistent lowering of energy consumption and the mostly mild weather. However, market expectations suggest that natural gas prices could rise again to around €50/MWh in the coming quarters.
The upward pressure on prices is likely to remain high, as is expected by companies, but will slow down over the course of the year, since the price pressure resulting from past cost increases and supply chain disruptions has largely been passed on. In addition, the energy prices on the world markets have currently fallen to pre-crisis levels, and monetary tightening is having a price-dampening effect on the demand side. From June to August, however, a temporary base effect resulting from the temporary reduction in fuel tax and the temporary introduction of the nine-euro public transport ticket is likely to push up prices compared with the previous year. Similarly, a base effect is expected in July as a result of the abolition of the EEG surcharge one year ago and another temporary base effect will be seen from October 2022 until March 2024 owing to the reduction in the VAT rate on gas and district heating during this period.
WEAKENING MOMENTUM IN THE LABOUR MARKET DUE TO LOW ECONOMIC ACTIVITY IN THE WINTER HALF-YEAR
The economic slowdown in the winter half-year 2022/23 is also reflected by slowing momentum in the labour market. Registered unemployment increased slightly in May, by 9,000 people in seasonally adjusted terms. The migration of refugees hardly had any impact: excluding Ukrainian refugees, the figure was about the same (+8,000 persons). Both employment (April +18,000 persons) and employment subject to social security contributions (March +13,000 persons) rose again, albeit at a lower rate. The number of people on short-time work was recently at a normal level, but the declines seen in recent months may now have come to an end. The leading indicators from the Institute for Labour Market Research (IAB) and ifo pointed to a gloomier picture in May. The slowdown in new industrial orders and inflation-related losses in purchasing power are leading to restraint among consumers and companies. The retail sector expects job cuts, but the service sectors are planning further hiring. The number of reported vacancies declined, but remain at a high level. The expected economic recovery in the further course of the year is likely to lead to an upswing on the labour market again.
1This report is based on data that was available as of 13 June 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.
14/06/2023 - PDF - Economic Situation and Cyclical Development
Publication:Ausgewählte Daten zur wirtschaftlichen Lage