The economic situation in Germany in August 2023¹

• Following the slight recession in the winter half-year of 2022/23, the German economy stagnated in the second quarter. While consumer spending is likely to have had a stabilising effect, the weak external environment had a dampening influence on production and exports. Recent leading indicators do not yet point to a lasting economic recovery in the coming months.
• Industrial output was down significantly in June compared with the previous month (-1.3%), with the automotive and construction industries in particular showing marked declines. New industrial orders increased strongly in June (+7.0%). However, this increase was mainly due to volatile large orders. Without large orders, order activity remains on a downward trend. The ifo business climate deteriorated further in July, with bleak expectations for future economic development.
• Retail sales excluding motor vehicles decreased again in June compared to the previous month (-0.6%), though in the second quarter as a whole there was an increase of 1.3% compared to the previous quarter. In view of falling inflation rates and rising wage settlements, consumer spending may increasingly provide some boost in the coming months.
• The upward trend in consumer prices eased further in July. The inflation rate fell to 6.2% (June: +6.4%) and the rate of core inflation also declined by 0.3 percentage points to 5.5%. Although food prices again rose at a disproportionately high rate (+11.0%), the year-on-year rate of increase has also decreased significantly in recent months (March: +22.3%).
• The labour market also reflected the overall economic weakness in July. However, the rise in unemployment seen in previous months did not continue. Registered unemployment most recently declined slightly while employment remained unchanged. The number of job vacancies was down only slightly in the second quarter compared with the previous quarter, but was 10 percent below the same quarter a year before. Despite the slight slowdown, companies’ demand for labour remained robust. The labour market is expected to become less dynamic in the coming months, with companies planning to hire fewer new employees.
• According to the final figures provided, the number of corporate insolvencies filed in May 2023 was 3.5% higher than in the previous month (May: 1,478, April: 1,428). Compared with the same month of the previous year, the increase was 19%. The leading indicator IWH Insolvency Trend shows a slight decline of 2.4% for July 2023 compared with the previous month, but remains well above the pre-year level (+44.4%). Overall, the trend shows a continuous increase in corporate insolvencies since mid-2022, albeit starting from a very low level.
• Current leading indicators such as new industrial orders and the business climate, as well as the subdued development of the global economy, do not point to a lasting economic recovery in Germany for the time being.

STAGNATION OF GROSS DOMESTIC PRODUCT IN THE SECOND QUARTER OF 2023

According to preliminary data issued by the Federal Statistical Office on 28 July, gross domestic product (GDP) stagnated in the second quarter after price, seasonal and calendar adjustment compared to the previous quarter. On the expenditure side, consumer spending in particular is likely to have had a stabilising effect following declining inflation and rising wages. By contrast, net exports (exports less imports) are likely to have had a particularly negative impact, as the weak external environment is having a dampening effect on exports and production. Along with the preliminary data issued, the Federal Statistical Office also presented regular revisions to GDP for previous years. According to the revisions, the economic contraction in the fourth quarter of 2022 (-0.4% instead of -0.5%) and in the first quarter of 2023 (-0.1% instead of -0.3%) was slightly less than previously reported. Detailed figures for the second-quarter national accounts will be published by the Federal Statistical Office on 25 August.

Following the – now somewhat less pronounced – decline in German economic output in the winter half of 2022/23, the generally expected economic recovery still failed to materialise in early summer. On the domestic front, the expected cautious recovery in consumer spending, services and investment is providing the first glimmers of hope, which are likely become stronger as the year progresses. At the same time, continued weak demand from abroad, continuing geopolitical uncertainties, persistently high rates of price increases and the increasingly tangible effects of monetary tightening are hampering a stronger economic recovery. Current leading indicators such as new industrial orders and the business climate still do not point to a lasting economic recovery in Germany in the coming months.

GLOBAL ECONOMIC OUTLOOK SUBDUED

Global industrial output remained unchanged in the month of May compared with the previous month (+0.0%), while global trade recorded a slight increase of 0.3%, although leading indicators for global trade point to mixed development in the coming months. The RWI/ISL Container Handling Index rose slightly, up from 123.2 to 125.2 points in the month of June, indicating a moderate recovery in world trade. However, this upturn in global container throughput is mainly attributable to ports outside Europe and China. In Northern Europe, the North Range Index remained relatively constant compared with May (104.0 after 104.2 points). According to ship movement data from the Kiel Trade Indicator, however, world trade is expected to weaken significantly in July (-1.6%).

The sentiment indicator of S&P Global has been consistently above the growth threshold of 50 points since February, but fell noticeably in June to 52.7 points, indicating a slowdown in the momentum of the global economy.
The IMF is expecting annual global economic growth of around 3% in the coming years, i.e. a below-average development in terms of a historical comparison. According to the current forecast average from Consensus Economics, economic activity among key German trading partners is likely to see a restrained increase (eurozone: +0.5%, USA: +1.6%). Asia, by contrast, is likely to provide stronger impetus for the global economy.

STILL NO GROWTH IMPETUS FROM GERMAN FOREIGN TRADE

At 0.8%, nominal exports of goods and services in June were up slightly on the previous month after adjustment for seasonal and calendar effects (May: -1.0%). In the quarterly comparison, however, they were 0.8% lower. Nominal imports of goods and services fell by -2.4% in June compared to May 2023, and are down -1.2% quarter-on-quarter. The development in exports of goods to the EU and non-EU countries varied: while shipments to the EU increased by 1.3%, exports of goods to third countries declined by 1.1%. The weaker demand from China was reflected in a significant drop in exports of goods to that country (-5.9%); exports of goods to the USA and the United Kingdom also declined slightly (-0.2% each). Imports of goods from the EU to Germany fell by -3.1%, and from other countries by as much as -3.7%, despite a significant increase in imports of goods from China (+5.3%).

As a result of declining imports coupled with moderately rising exports, the monthly trade surplus increased noticeably, up from €10.9 billion in May to €16.0 billion in June.

In terms of foreign trade prices, the reference period continues to reflect the effects of falling energy and raw material prices on the world markets and the reduction in supply chain bottlenecks. The terms of trade improved by 1.5% in June compared with the previous month, as imports again fell much more sharply (-1.6%) than exports (-0.1%). Exports are therefore also likely to have risen slightly in real terms, while imports are likely to have fallen less sharply in real terms.

The leading indicators currently paint a weak picture for the future development in exports. The ifo export expectations fell slightly to -6.0 points in July, following a sharp decline from +0.9 to -5.9 points from May to June. The Kiel Trade Indicator signals a decline in German exports of 0.4% in real terms for July.

INDUSTRIAL OUTLOOK REMAINS SUBDUED

According to the Federal Statistical Office, production in the manufacturing sector fell noticeably by 1.5% in June compared with the previous month, after remaining nearly unchanged in May (-0.1%). Output in industry and construction recently decreased by -1.3% and -2.8% respectively. The energy sector stabilised in June (+0.6%), following sharp declines in the preceding months.

In the two important industrial sectors of automotives/automotive parts and mechanical engineering, production decreased by 3.5% and 1.3% respectively in June. The energy-intensive industries, however, recorded an overall increase of 1.1%, with increases in chemical products (+3.5%) and coking and oil processing (+15.3%) being offset by decreases in metal production and processing (-3.1%), paper and cardboard (-2.3%), and glass, glassware and ceramics (-0.7%).

At +7.0%, new orders in the manufacturing sector were again up strongly in June compared with the previous month. In the previous month, they had already seen significant growth (+6.2%). However, the month-on-month increases were mainly due to large orders. Excluding large orders, new manufacturing orders fell by -2.6% in June.

New orders developed particularly positively in the fields of electrical equipment (+9.6%), pharmaceutical products (+7.0%) and the important mechanical engineering sector (+5.1%). The equally important automotive and automotive parts sector, however, saw a sharp drop of new orders (-7.3%), and new orders also declined in the field of IT and optical equipment (-3.3%). In the construction of other vehicles, a major order in the aerospace sector (+89.2%) had a particularly strong impact.

Following slight increases in April and May, industrial output was weak at the end of the second quarter. Quarter-on-quarter, there was a decline of -0.6%. Another significant decline of -3.4% was recorded in the energy-intensive industries. Order activity in industry continues to show a mixed picture, characterised by strong fluctuations and special effects from large orders. In the more meaningful quarterly comparison, however, orders in the second quarter were stable at +0.2% compared with the first quarter. In view of the subdued business and export expectations of companies, a noticeable recovery of the industrial economy is not yet in sight.

RETAIL SALES DECLININIG SLIGHTLY AGAIN, CONSUMER SENTIMENT IMPROVING AT A LOW LEVEL

Retail sales excluding motor vehicles fell -0.6% in June from the previous month, after rising +2.1% in May and +0.8% in April. This resulted in an overall increase of +1.3% in the second quarter compared with the previous quarter. However, compared with the second quarter of 2022, the retail sector reported a decline in real sales of 2.5%, mainly reflecting persistently high price increases. Trade in foodstuffs recorded a decrease of 1.3% month-on-month in June, while the year-on-year decline was somewhat more pronounced (-3.1%). Food continues to be a strong driver of consumer prices, even though the price increases year-on-year have recently weakened further (July: +11.0%, June: +13.7%, May: +14.9%, April: +17.2%). Online and mail-order trade increased by 2.9% in June (compared with -1.9% in the same month of the previous year).

New registrations of passenger cars by private owners increased by 2.7% in July, after falling by 1.6% in June (May: +2.9%).

Leading indicators of consumer sentiment are sending mixed signals: according to GfK's forecast, sentiment among private consumers will recover in August after suffering a minor setback in July. Previously, it had risen eight times in succession, starting from a very low level. Although the ifo business situation in the retail sector improved somewhat as a result of the slight growth in consumer spending, business expectations deteriorated noticeably again in July and are now deeply negative. Consumer spending initially stabilised in the second quarter after significant declines in the winter. Overall, recent leading indicators suggest a subdued development. With inflation rates continuing to fall and collective wage agreements rising, consumer spending is expected to pick up overall.

DOWNWARD TREND IN INFLATION CONTINUES

The inflation rate (consumer price increase within one year) decreased slightly to 6.2% in July (May: +6.4%). The core rate (excluding energy and food) also decreased to 5.5% (June: +5.8%). In July, food prices again rose at a disproportionately high rate (+11.0%) compared with the same month of the previous year, although inflation continued to ease (June: +13.7%, May: +14.9%, April: +17.2%). Energy prices rose by +5.7% year-on-year in July, slightly less than the overall index, but more strongly than in June (+3.0%). This was also due to a base effect resulting from the discontinuation of the EEG surcharge as of 1 July 2022.

Price pressure from energy sources has decreased further. Prices for natural gas fell on the spot markets: at €29/MWh, the TTF base load is currently 86% below the level of the previous year and 15% below that of the previous month. After peaks of over €300/MWh in August 2022, the consistent lowering of energy consumption, the mostly mild weather and the high gas storage levels contributed to this decline. However, market expectations suggest that natural gas prices could rise again to around €50/MWh in the coming quarters. The futures prices are not likely to settle back at pre-crisis levels until 2027.

In view of the development in energy prices, the upstream stages of the economy are seeing less price pressure. Import prices fell by 1.6% in June compared with the previous month and are thus 11.4% below the pre-year level. Producer prices rose only slightly, up by 0.1% year-on-year in June (May: +1.0%; April: +4.1%); they decreased month-on-month (-0.3%). Wholesale selling prices also slipped in June, both month-on-month (-0.2%) and year-on-year (-2.9%). There was a year-on-year decline at all three economic levels, which is likely to be reflected with a lag in declining consumer price inflation.

The upward pressure on prices is likely to remain high in the coming months, as is expected by companies, but will gradually slow down, since the price pressure resulting from past cost increases and supply chain disruptions has largely been passed on. Energy prices are at a moderate level. Monetary tightening is having a dampening effect on the demand side. Against this background, the current forecast range for inflation is 5.3% to 6.1% in 2023 and 2.0% to 3.1% in 2024. Other base effects increasing the price level must also be taken into account: in the period from October 2023 to March 2024, the VAT reduction on gas and district heating a year earlier is expected to lead to a slight increase.

WEAK ECONOMIC ACTIVITY CONTINUES TO HAMPER THE LABOUR MARKET

The weak economic activity was also reflected on the labour market in July, but the rise in unemployment seen in previous months did not continue. Unemployment fell slightly, down by 4,000 people on a seasonally adjusted basis. One reason for this may also be the effects of the migration of refugees: their increased participation in integration classes lowers the unemployment rate. Employment in June was unchanged from the previous month, with a strong upward revision of 20,000 from May. This figure is also likely to reflect the revised official GDP figures from the end of July. Employment subject to social security contributions increased in May (+14,000 seasonally adjusted). Short-time work continued to decline significantly in July, partly because the eased access conditions expired at the end of June. The leading indicators from the IAB and ifo showed moderate economic development in July, suggesting reduced momentum on the labour market. The number of registered vacancies fell to 1.74 million in the second quarter, down 10 per cent from the same quarter the year before. Companies are planning fewer new hires. Nevertheless, the employment component of the IAB barometer remains at a high level. The labour market thus continues to be stable overall. However, the weak underlying momentum is likely to persist until the German economy picks up again.

INSOLVENCIES INCREASED IN SPRING 2023

According to final figures, the number of corporate insolvencies filed in May 2023 (1,478) increased by 3.5% compared to the previous month (1,428) and by 19% compared to the same month last year (1,242). From January to May 2023, a total of 7,023 corporate insolvencies were filed, an increase of 17.6% compared to the same period last year (5,973).

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 +4.1% month-on-month in July 2023 and were thus 23.8% higher than a year earlier. The number of 2,962 applications filed in July 2023 is the second highest in the last 12 months (highest number in March 2023: 3,040). The IWH insolvency trend shows a total of 1,025 reported insolvencies of partnerships and corporations for July 2023; this figure is slightly below the level of the previous month (-2.4%), but significantly higher than the pre-year level (+44.4%). Overall, the trend in the rate of insolvencies has kept on rising since the second half of 2022, albeit starting from a very low level.

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