The economic situation in Germany in November 2023¹

• Declining levels of consumer spending and weak foreign demand were the drivers behind the stagnation in the German economy that continued throughout Q3. Even though the overall economic environment is improving – thanks to significantly falling inflation rates, growing real incomes and a slight brightening of business sentiment – the weak statistics from the end of Q3 are putting a burden on the beginning of the last quarter of 2023.
• Industrial output shrank markedly between August and September (-1.7%), whereas construction sector output stagnated (0.0%). New orders in the manufacturing sector saw a slight increase towards the end of the quarter (+0.2%). However, stabilising demand and also the sentiment indicators such as ifo business expectations and the ZEW Indicator of Economic Sentiment suggest that industrial activity may be bottoming out.
• Development in the retail trade remained weak. Real retail turnover (excluding cars) dropped by 0.6% between August and September. However, the combination of rising wages and falling inflation rates means that consumer spending is likely to recover over the coming quarters.
• In October, the inflation rate fell to 3.8% – the lowest level recorded since August 2021. Energy prices fell for the first time since January 2021 (-3.2%), albeit due to a base effect caused by the high level of energy prices in 2022. Prices of foodstuffs continued to rise at a disproportionate rate (+6.1%) in October, but inflation lessened even for these (September: +7.5%).
• The job market continues to be marked by the period of economic weakness, resulting in a low-level autumn recovery. Seasonally adjusted unemployment rose by 30,000 people in October. The labour market is not expected to see a recovery until the spring.
• According to the final figures, the number of companies filing for insolvency in July (1,586) was +2.5% higher than in June (and up +37.4% from July 2022). The trend towards higher insolvency figures that began in mid-2022 is therefore continuing. According to the Halle Institute for Economic Research’s Bankruptcy Update, the number of insolvencies is likely to increase slightly by 2.1% in October compared to September (+43.6% compared to October 2022). For interpretation of these figures, it is important to note that the considerable increases compared to the figures for 2022 are partly due to a base effect: up until mid-2022, filings for insolvency were at a historic low stemming from the temporary suspension of the obligation to file for insolvency and by comprehensive government support measures.

GERMAN ECONOMY REMAINS FLAT

The German economy is continuing to stagnate. The rapid estimate made by the Federal Statistical Office on 30 October suggests that GDP fell slightly by 0.1% in Q3 2023 compared to Q2 2023, after adjustment for price, calendar, and seasonal factors. At the same time, the Federal Statistical Office revised the figures for Q1 and Q2 upwards by 0.1 percentage points each, to reach 0.0% and +0.1% respectively; a revision that does not fundamentally alter the impression that we are currently in a phase of economic weakness.

According to initial and preliminary information, private consumption, which was affected by earlier losses of purchasing power and consumer uncertainty, continued to put a damper on economic development in Q3. Given the lasting weakness of the global economy it is likely that the quarter-on-quarter comparison of the foreign trade figures will also be negative, with both exports and imports registering considerable decreases. On a positive note, investments in equipment have once again increased and are bolstering growth. It is likely that, like industrial output, output from construction and retail and wholesale will also have continued to fall. By contrast, business-related services are likely to have seen a more positive development. The decrease in GDP in Q3 had been expected on the basis of the existing indicators (industrial output, new orders).

The period of economic weakness is continuing to be felt on the job market; job creation has stopped and the unemployment rate (adjusted for season) is slowly on the rise again. Current leading indicators suggest that this period of economic weakness is likely to continue to strain the job market over the winter and that a recovery cannot be expected before the spring.

Even though individual sentiment indicators such as the ifo figures for business expectations or the ZEW Indicator of Economic Sentiment suggest that a bottom is being reached and even though the business environment is improving as a result of the palpable decline in the inflation rate and the return to real-wage growth, the prospects for the final quarter of this year are weakened by the unfavourable statistical starting point as of the end of Q3.

GLOBAL ECONOMY STILL WEAK, DIVERGENT TRENDS INCREASING

Global industrial output grew moderately in August over July (0.7%), with global trade also seeing only a slight expansion by 0.4%. The leading indicators are currently sending mixed signals about the future development of global trade. The RWI/ISL Container Throughput Index did rise somewhat in September (seasonally adjusted) from 124 to 128 points, and this was said to be largely due to container throughput in Chinese ports. However, the Nordrange Index, which is particularly telling about business activities in Europe, once again fell by a considerable margin (from 102 to 99 points). For the reporting month of October, the shipping movement data from the Kiel Trade Indicator (KTI) are suggesting that global trend should be stabilising towards the end of the year. According to the KTI, both global trade (+2.0%) and the level of exports from the major European economies are likely to have expanded by a palpable rate.

The sentiment indicator published by S&P Global dropped further in October to reach 50 points, which is the growth threshold. Sentiment worsened both in the manufacturing sector (48.8 points) and among the services sector (50.4%), figures that translate into weak prospects overall for the global economy. The forecasts published by international organisations show that the global economy is expected to grow at a below-average rate of just under 3% in the coming two years. On the one hand, many countries are seeing inflation abate and wages rise in combination with a robust job market, meaning that consumer spending is likely to pick up over the months to come. On the other hand, geopolitical conflict is generating a high level of uncertainty, monetary and fiscal policies are being tightened and there is growing fragmentation in the global economy – all factors that are dampening growth prospects. In the coming year, demand from key trade partners for Germany, including the U.S. and China, is expected to slow down along with their economic growth. That said, Europe’s economies, which together form Germany’s most important sales market, are likely see the slow beginnings of a recovery.

WEAK GLOBAL ECONOMY SLOWING FOREIGN TRADE

Nominal exports of goods and services saw another fall between August and September after adjustment for seasonal factors and calendar irregularities (-0.2%; August: +0.6%). This means that they are 1.5% lower than the figures for the second quarter. By contrast, nominal imports of goods and services increased in September (up 0.9%, August: -2.1%). However, compared to the figures for Q2, they are down -2.7%.

Foreign trade prices are still being affected by the high price rises for imports last year, particularly energy imports as a result of the war in Ukraine. Import prices fell considerably year-on-year, by 14.3%, from September 2022. Compared to the preceding month, however, they were once again slightly higher (+1.6%). In contrast, export prices only rose by 0.4%, so that the terms of trade deteriorated somewhat, down -1.2% from the preceding month. In real terms, the fall in exports is likely to have been slightly steeper and imports are expected to have also fallen in real terms.

With exports falling (in nominal terms) and imports rising, the monthly trade surplus from the goods trade shrank from €17.2 billion in August to €15.6 billion in September.

The leading indicators are currently sending mixed signals about the future development of exports: The ifo export expectations have been clearly below zero since June, but have seen slight signs of improvement in October (up from -10.8 to -6.9 points). Also, the shipping movement data from the Kiel Trade Indicator are suggesting an increase in German (real) exports (+1.8% for the reporting month of October). Nevertheless, because of the weak dynamics in the global economy overall and the high level of uncertainty caused by geopolitical conflict, foreign trade is not expected to recover appreciably in the short term.

APPRECIABLE SLOWDOWN OF INDUSTRIAL PRODUCTION TOWARDS THE END OF THE QUARTER

Manufacturing output in September saw a drop compared with the preceding month, falling by 1.4%. This means that the downward trend that began in the summer is continuing. The industrial sector and the energy sector registered a decline of 1.7% each, whilst output from the construction sector stagnated (0.0%).

The individual branches within the industrial sector saw differing developments in September: the important automotive and automotive parts sector shrunk (-5.0%), albeit after registering a hefty expansion in August (+7.3%). By contrast, mechanical engineering was able to increase its output (+4.1%), as was the energy-intensive chemicals sector (+0.9%). Overall, however, output from the energy-intensive industries fell by 0.4% in September.

New manufacturing orders followed a strong rise of 1.9% in August with a 0.2% increase in September. Orders from abroad saw a strong increase (+4.2%), whereas domestic demand fell by a hefty margin (-5.9%). Once again, the proportion of large orders was above average; excluding these, the volume of new orders fell by 2.2%. The mechanical engineering sector, in particular, registered a strong increase in its new order volume (+8.5%). By contrast, the similarly important automotive and automotive parts sector once again saw its new orders decline (-2.5%). New orders for pharmaceuticals also fell (-7.6%). With now three consecutive slight increases, the energy-intensive production of chemicals has stabilised (most recently: +0.6%).

Industrial output once again registered a marked decline towards the end of Q3, resulting in a more telling quarter-on-quarter development of -2.1% (Q2: -0.7%). However, new orders for the manufacturing sector have recently stabilised and the sentiment indicators such as ifo business expectations and the ZEW Indicator of Economic Sentiment suggest that industrial activity may have bottomed out in Q3.

RETAIL TURNOVER REMAINS WEAK

Real retail turnover excluding motor vehicles fell again by 0.6% in September compared to the preceding month, resulting in the fourth consecutive downward development. Compared with the same month a year ago, the retail sector experienced a real sales decline of 4.1% in September, which is especially due to the high price increases. Trade in foodstuffs grew by 2.6% in real terms in September compared with August. This marks the first time in this segment of the retail trade that sales remained stable compared to the preceding year, after more than two years of continuously falling turnover caused mainly by the strong inflation in food prices. Online and mail-order trade shrank by 3.6% in September (-6.6% down against the same month of the preceding year).

The number of new registrations of passenger cars by private owners increased by +9.1% in October, following a 0.7% decline in September. Total new registrations of passenger cars saw a much smaller rise auf 1.1% in October. This is mainly due the weak development of new registrations of passenger cars by companies and self-employed individuals, which, following the phase-out of the ‘environmental premium’ at the end of August, dropped by another 2.8% in October.

Most recently, the leading indicators for the future development of consumer spending sent mixed signals: according to the GfK forecast, the consumer climate will once again be dimmed in November, after slight falls in September and October. All in all, however, after the palpable recovery phase in the winter semester of 2022/2023, the consumer climate is still much better than it was in October 2022. The ifo business expectations in the retail sector improved for the third consecutive time in October, but not enough to climb out of the negative figures. In November, the assessment of the current situation became more clouded again. Overall, the most recent leading indicators suggest that consumer spending is likely to remain restrained for the time being. However, the combination of rising wages and falling inflation rates is expected to result in a recovery of consumer spending around the turn of the year.

INFLATION RATE DROPS APPRECIABLY

The rate of inflation, i.e. the rise in the price level within the space of a year, is predicted to have stood at 3.8% in October. That is the lowest figure since August 2021 and is largely due to a base effect (very high energy price level in 2022). The corresponding figure for September had stood at 4.5%. The core rate (excluding energy and food) was 4.3% in October (September: +4.6%), and was again higher than the inflation rate. Year-on-year, food prices again rose at a disproportionately high rate (+6.1%) in September, although inflation also continued to ease here too (September: +7.5%). Energy prices compared to the preceding year fell for the first time since January 2021 (-3.2%). This is largely due to a base effect caused by the high level of energy prices in 2022. Inflation in the services sector stood at +3.9%, which is largely unchanged (September: +4.0%).

On the spot markets, prices for natural gas have had a tendency to rise again since mid-July. Currently, however, the TTF Base Load stands at €45/MWh, 60% down on the level of August 2022. This does, however, correspond to an increase of approx. 7% over the preceding month. The market expects that natural gas prices will stand at approx. €50/MWh in the coming quarters. The futures prices are not likely to settle back at pre-crisis levels until 2027.
The upstream stages of the economy are also seeing less price pressure. Producer prices fell by 14.7% between September 2022 and September 2023 (August: -12-6%; July: -6.0%). That was the sharpest drop since statistics began in 1949, and is due to a base effect resulting from the high price level last year. In the wake of the war in Ukraine, producer prices had seen a record rise in August and September 2022 (August 2022: +46.1%; September 2022: +45.8% year-on-year). Producer prices fell by 0.2% from the preceding month’s level. Import prices fell sharply by -14.3% year-on-year in September (+1.6% month-on-month). Wholesale selling prices did rise between August and September (+0.2%), but dropped by -4.1% year-on-year.

Not least on the basis of companies’ expectations regarding price developments, the upward pressure on prices is likely to remain elevated in the coming months, but will gradually slow down. 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 Autumn Projection by the Federal Government expects the inflation rate to be 6.1% in 2023, and +2.6% and 2.0% respectively for 2024 and 2025.

AUTUMNAL REVIVAL ON THE LABOUR MARKET REMAINS WEAK

The period of economic weakness is continuing to be felt on the job market. In October the unemployment rate fell less than average for the season. In seasonally adjusted terms, there was, in fact, a rise of 30,000 persons. Gainful employment remained roughly the same between August and September (+3,000 person in seasonally-adjusted terms), but crossed the threshold of 46 million people to reach a new all-time high. The number of jobs subject to social-security contribution also remained largely unchanged in August (-3,000 in seasonally-adjusted terms). The number of people in short-time work rose slightly in August, as did notifications of short-time work in October; however, just like in the preceding month, this was due to supply bottlenecks in some automotive factories (floods in Slovenia). The leading indicators saw a divergent development. The ifo employment barometer rose in October, indicating that companies’ readiness to hire new staff is slightly on the rise. The IAB barometer also shows a positive outlook on employment, albeit considerably less so than in spring. The IAB component on unemployment, however, became more clouded again, indicating that the unemployment rate is likely to continue to rise. Overall, the current economic weakness is expected to slow down the labour market in the winter, with a recovery not expected before the spring.

NUMBER OF INSOLVENCIES ON THE RISE

According to final figures, the number of insolvency filings rose slightly by 2.5% between June and July 2023 (July: 1,586; June: 1,548). The pronounced increase in filings year-on-year (+37.4% compared to July 2022), however, does not represent a wave of insolvencies (although some industries are hit much harder than others), but can (still) be interpreted as a return to normal. Up until mid-2022, filings for insolvency were at a historic low stemming from the temporary suspension of the obligation to file for insolvency and by comprehensive government support measures. For this reason, the current hikes in the figures compared with 2022 can be explained by a base effect. At the same time, there can be no doubt that the challenging economic environment combining weak demand, high energy prices, higher financing costs and geopolitical risks is putting a considerable burden on many companies. Compared to pre-pandemic levels, more specifically the mean value for the period from 2016-2019, the official number of filings for insolvency in the period between January and July 2023 is still much lower (by a small double-digit figure). That said, the most recent figures are approaching the mean value for 2016-2019 (January 2023: -23.7%; July 2023: -5.4%). In terms of the number of employees affected by insolvency proceedings (+54.4%) and of expected claims (+21.7%), however, the figures for the period between January and July 2023 is already clearly above the pre-pandemic level.

Most recently, leading indicators such as the Halle Institute for Economic Research’s Bankruptcy Update show that the stabilisation of insolvency filings that has been observed since July is continuing at a slightly higher rate (+2.1% between September and October 2023). According to the Halle Institute for Economic Research’s Bankruptcy Update, insolvency figures are expected to rise gradually over the next few months.

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¹ This report is based on data that were available as of 13 November 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.