The economic situation in Germany in January 2024¹

1. The phase of economic weakness continued at the turn of the year. Gross domestic product (GDP) fell by 1⁄4 % at the end of 2023 after price, seasonal and calendar adjustments and current leading indicators do not suggest a rapid economic recovery as yet. However, the downward trend in inflation, rising real wages and the gradual recovery in the global economy will help reduce some of the main burdens for the German economy over the course of this year. This will spur a recovery driven primarily by the domestic economy. 2. Output in the goods-producing sector continued to decline in November and was down 0.7%. There were further declines in industry and construction (-0.5 % and -2.9 % respectively), while the energy sector once again reported a significant increase (+3.9 %). While there have recently been signs of domestic orders starting to stabilise in key areas, weak foreign demand, particularly from the eurozone, continues to restrain industrial activity. The industrial economy is not expected to recover until later in the year, when the domestic economy and exports pick up again. 3. Real retail sales excluding motor vehicles fell noticeably by 2.2% in November compared with the previous month, after a marked rise in October (+1.3 %). Compared with the same month a year ago, the retail sector experienced a real sales decline of 2.0% in November. Leading indicators currently present a mixed picture: while private consumer sentiment is tending to improve, the business situation in the retail sector is rated as rather unsatisfactory according to surveys conducted by ifo and the HDE trade association. 4. The inflation rate is expected to have totalled 3.7% in December, compared to 3.2% in November. The main reason for this was a base effect due to the so-called December Immediate Assistance provided at the end of 2022. At the beginning of this year, the inflation trend is likely to be influenced by tax and fiscal measures. However, inflation-reducing factors (falling producer and import prices, the ECB’s tight monetary policy, appropriate wage settlements and normalisation of profit margins) will continue to dominate the development during the rest of the year. 5. The trend on the labour market showed the usual seasonal development at the end of the year. Unemployment rose in unadjusted figures as usual in December; adjusted for seasonal fluctuations, there was a slight increase of 5,000 people. Employment continued to trend upwards in November. Leading indicators improved across the board, but do not yet point to a fundamental reversal of the trend. 6. According to final figures, the number of insolvency filings fell by 4.9% in October 2023 (1,481) compared to the previous month. Compared to the same month last year, there was an increase of 19.0%. Corporate insolvencies are still slightly below the pre-Covid level.

CONTINUING ECONOMIC WEAKNESS IN THE WINTER HALF-YEAR 2023/24

The overall economic situation at the turn of 2023/24 remains very weak due to the repercussions of the previous crises, in particular the considerable loss of purchasing power as a result of the sharp rise in energy and food prices, the weak global economic development, the geopolitical crises and the tightening of monetary policy. According to initial, provisional information from the Federal Statistical Office, gross domestic product fell by around 1⁄4 % at the end of the year compared to the previous quarter, adjusted for price, seasonal and calendar effects. This results in a decline in GDP of 0.3% for the year as a whole. This result was largely expected. Last year, consumer spending in particular fell by 0.8% (price-adjusted) due to the lingering loss of purchasing power and consumer restraint, and partly as a result of the increased uncertainty among consumers caused by the geopolitical conflicts. It was still slightly below the level of the pre-Covid year 2019. Public-sector consumption was also down -1.7 % on the previous year. This reflects the post-pandemic normalisation of government spending following the significant expansion during the coronavirus pandemic. Gross fixed capital formation fell slightly by -0.3%, mainly because construction investment fell again by around two per cent on average in 2023 (price-adjusted) as a result of higher financing and material costs. In contrast, investments in machinery and equipment increased significantly by +3.0%. In addition to the well-filled order books and the good equity base of companies, increasing investments in the transformation – supported by government measures – are also likely to have contributed to this. Exports fell by 1.8% as a result of weak demand from abroad. Imports fell even more sharply by -3.0% due to weak domestic demand, which is the reason why foreign trade contributed +0.6 percentage points to GDP growth.

The labour market proved robust despite the period of economic weakness; employment continued to increase during the year (+0.7%) and reached a historic high of some 46 million people on average in 2023.

The disposable income of private households also developed positively and saw a strong rise of +5.9% in 2023. Both wages and salaries (+6.7 %) and corporate and investment income (+6.5 %) were up significantly. In addition to noticeable wage increases, income growth was also supported by government relief measures to mitigate the loss of purchasing power due to inflation. These measures include the cap on energy prices, tax-free inflation compensation premiums and increases in social benefits (housing benefit, citizen’s benefit, increase in child benefit). These measures benefited the lower income groups in particular.

A reversal in the economic trend is not yet expected for the first quarter of this year given the recent continued weakness of leading indicators as well as ongoing and new geopolitical crises, which could lead to rising transport costs and delays in supply chains, and temporary administrative increases in consumer prices at the start of the. However, the downward trend in inflation, rising real wages and the gradual recovery in the global economy will help reduce some of the main burdens for the German economy over the course of this year, allowing a recovery driven primarily by the domestic economy to begin.

GLOBAL ECONOMY IS LOSING MOMENTUM TOWARDS THE END OF THE YEAR

Global industrial output moved sideways in October, following slight increases in the two previous months. The sharp rise in interest rates and the ongoing reduction in high inventory levels in the wake of the supply chain disruptions continued to weigh on the industrial economy. In December, the global purchasing manager indexes remained below the threshold for growth in many of Germany’s key trading partner countries. The S&P Global sentiment indicator continued to recover in December and now stands at 51 points – slightly above the threshold for growth. Recently, sentiment in the manufacturing sector deteriorated slightly from 49.3 to 49.0 points whereas the mood in the services sector improved by one point to 51.6 points.

Global trade continued to grow slightly in October compared to the previous month (+0.4%) and the RWI/ISL Container Throughput Index also increased somewhat from 123.7 to 124.5 points (seasonally adjusted), suggesting modest growth in November. At the same time, however, the North Range Index for European ports fell quite significantly (from 103.7 to 101.0 points). For December, however, the latest ship movement data from the Kiel Trade Indicator (KTI) again signalled a decline in global trade activity overall. The attacks on freighters in the Red Sea also contributed to this, leading to a slump in container shipments through the Red Sea and significantly longer transport times as a result of ships being diverted around Africa.

However, according to forecasts by international organisations, a moderate recovery in the volume of global trade (2023: 0.5%, 2024: 3.1%) can be expected this year once the inventory corrections have been completed. The recovery is expected to lead to a rise in new business transactions – even if global GDP is likely to continue to grow at a below-average rate of around 3%. In the western economies, economic growth is likely to converge in the wake of the economic slowdown in the USA and the recovery in the EU countries following the severe impact of the energy price crisis. In Asia, by contrast, a divergence is expected between the weakening growth rates in China and Japan and the relatively strong growth in the other Asian countries, especially India. Overall, demand for German export goods is likely to increase noticeably again this year following the considerable weakness last year.

SILVER LINING FOR FOREIGN TRADE

In November, nominal exports of goods and services (adjusted for seasonal and calendar effects) rose significantly compared to the previous month for the first time since spring 2023 (+1.9%, October: +0.1%).

They were also up 1.1% in the less volatile two-month comparison. In particular, deliveries to EU countries outside the eurozone contributed to this (+5.9%). Nominal imports of goods and services also recovered noticeably rising by 1.3% compared to the previous month (October: -0.1%). In the two-month comparison, imports also turned positive for the first time since June 2023 (+0.9 %).

The fall in prices of energy imports continues to have an impact on foreign trade prices. Whilst import prices fell sharply by 9.0% year-on-year in November, they stagnated compared to the previous month after adjustment for seasonal variations. At the same time, export prices fell slightly by 0.2% compared to the previous month, mainly due to falling prices for manufacturing exports. The terms of trade deteriorated by 0.2% overall compared to the previous month.
As exports rose more sharply than imports, the monthly trade surplus increased from €16.4 billion in October to €17.6 billion in November. At €159.8 billion, the cumulative trade surplus in the period from January to November 2023 is more than twice as high as the previous year’s figure in the same period (€76.3 billion).

The leading indicators are currently sending mixed signals about the future development: New industrial orders from abroad have been trending downwards since the summer, with demand from the eurozone in particular continuing to fall significantly of late. The ifo export expectations deteriorated again in December from -4.1 to -6.7 points, after having brightened for two months in a row. In addition to companies in the mechanical engineering sector, car manufacturers are now also expecting fewer orders from abroad. The ship movement data of the Kiel Trade Indicator is currently signalling a decline in real German exports for the month of December (-1.9% year-on-year).

Although the November data for German foreign trade represents a silver lining for the export-oriented German industry, a rapid trend reversal is not to be expected in view of the current indicators that are still weak overall. The majority of companies surveyed by the ifo Institute continue to expect exports to decline in the coming months and container handling and ship movement data also remain subdued. In addition, the risks for global trade have recently tended to increase as a result of the crisis in the Red Sea and the associated higher transport and freight costs.

INDUSTRIAL PRODUCTION CONTINUES DOWNWARD TREND

According to the Federal Statistical Office, production in the manufacturing sector fell by 0.7% in November compared to the previous month. This continued the downward trend seen since the spring of last year. In November, there were further declines in industry and construction (-0.5 % and -2.9 % respectively), while the energy sector once again reported a significant increase (+3.9 %).

The individual branches within the industrial sector saw differing developments in November: the important automotive and automotive parts sector and the electrical equipment sector reported falls in output of 0.6% and 3.3% respectively; there were also declines in pharmaceutical products (-3.8%) and data processing equipment as well as electrical and optical products (-5.7%). By contrast, the important mechanical engineering sector saw an increase of +1.1 %. There was also growth in output in the energy-intensive industries as a whole (+3.1 %), which was distributed across the five sectors as follows: chemical products (+5.1 %), coking and oil processing (+3.2 %), paper and cardboard (+2.6 %), glass, glassware and ceramics (+1.8 %) and metal production and processing (+0.5 %).

Industrial production in November was 1.9 % below its average level in the third quarter, meaning that another noticeable decline is expected for the fourth quarter as a whole.

According to the Federal Statistical Office, new manufacturing orders increased slightly in November compared to the previous month (+0.3%) following a marked decline in October (-3.8%). Once again, domestic demand (+1.4%) – particularly for capital goods (+3.4%) – had a stabilising effect, while orders from abroad continued to fall (-0.4%) due to the ongoing decline in orders from the eurozone. Adjusted for large orders, new manufacturing orders were also slightly down on the previous month (-0.6%). Most branches of industry reported an increase in orders. Especially the important areas of vehicles (+4.7%), chemical products (+3.7%), electrical equipment (+4.8%) and mechanical engineering (+3.9%) recorded significantly higher order numbers than in the previous month. In contrast, the volatile sector of other vehicle manufacturing experienced a sharp drop (-32.1%) after a strong increase in the previous month. Orders in metal production (-7.1%) and pharmaceutical products (-4.7%) were also lower than in the previous month.

While there have recently been signs of domestic orders starting to stabilise in key areas, weak foreign demand, particularly from the eurozone, continues to restrain industrial activity. Leading indicators are currently sending mixed signals, with business sentiment recently deteriorating slightly again. A change in the current economic trend can therefore not be expected any time soon. Over the course of the year, however, it is likely that industrial production will pick up again as it is expected that the domestic economy will recover and exports will rise again.

STILL NO TURNAROUND IN RETAIL SALES

Real retail sales excluding motor vehicles fell noticeably by 2.2% in November compared with the previous month, after a marked rise in October (+1.3 %). Compared with the same month a year ago, the retail sector experienced a real sales decline of 2.0% in November which is partly due to the sharp increase in prices. Trade in foodstuffs fell by 0.4% in real terms in November compared with October. Due to the sharp rise in food prices, this segment of the retail sector has mostly recorded year-on-year real sales declines for more than 2.5 years, though these have flattened out recently. Food prices continue to rise at an above-average rate, even though food price inflation has continued to slow compared to the same month a year ago (December: +4.5 %). Online and mail-order trade shrank by 1.5% in November (-1.8% down against the same month of the preceding year).

There was a slight increase of 1.4% in new car registrations in December compared to the previous month; the more meaningful two-month comparison also showed that new car registrations stabilised (+0.2%) after high fluctuations in the previous months. The number of new registrations of passenger cars by private owners increased strongly in December, up +10.3%. The two-month comparison also showed a clear upward trend of +7.3%. In contrast, new car registrations by companies and self-employed persons fell for the fourth time in a row in December (-3.5%). This volatile development has likely been due to the fact that people brought forward their purchases due to the expiry of the ‘environmental premium’ for commercial registrations at the end of August and for private individuals on 18 December.

Leading indicators for the future development of consumer spending currently present a mixed picture: According to the GfK forecast, the consumer climate will improve once again in January after deteriorating slightly between September and November. The ifo business expectations in the retail sector weakened in December (-2.8 points) and remain in negative territory. The assessment of the current situation has also worsened. Retailers recently rated the 2023 Christmas business before the holidays as disappointing.
While it can be seen that private consumer sentiment is tending to improve, the business situation in the retail sector is rated as ‘rather unsatisfactory’ according to surveys conducted by ifo and the HDE trade association. However, with incomes continuing to rise and inflation rates falling, private consumption is likely to recover over the course of the year.

INFLATION RISES AT THE END OF THE YEAR DUE TO BASE EFFECT

The rate of inflation, i.e. the rise in the price level within the space of a year, is predicted to have stood at 3.7% in December. The corresponding figure for November had stood at 3.2%. The main reason for the increase in the rate was a base effect due to the so-called December Immediate Assistance provided at the end of 2022, which had a dampening effect on the consumer price index a year ago.

The core rate (excluding energy and food) fell further in December to 3.5% (Nov.: +3.8%) and was therefore only slightly below the inflation rate due to the base effect in energy prices. The average increase in consumer prices in 2023 is expected to be 5.9% (core rate: +5.1%). Year-on-year, food prices again rose at a disproportionately high rate (+4.5%) in December, although inflation continued to ease here too (November: +5.5%). Following two successive falls (Nov: -4.5%; Oct: -3.2%), energy prices rose again by 4.1% year-on-year due to the base effect. Inflation in the services sector saw another slight decrease and stood at +3.2% (November: +3.4%).

The upstream stages of the economy are also seeing less price pressure. Producer prices fell by 7.9% in November 2023 compared to the preceding month. The corresponding figure for October stood at -11.0%. As in previous months, the main reason for this was a base effect caused by the high price increases in the previous year as a result of the effects of the war in Ukraine. Compared with the preceding month’s level, producer prices fell by 0.5% in November. Import prices in November were 9.0% lower than in the same month a year ago (-0.1% compared to the previous month). Wholesale selling prices dropped by 3.6% year-on-year in November. There was also a decrease compared with the preceding month (-0.2%).

Prices for natural gas recently fell again on the spot markets. Currently, however, the TTF Base Load stands at around €30/MWh, roughly 55% down on the level of November 2022. This corresponds to a decrease of approx. 20% over the preceding month. The market expects that natural gas prices will remain below €50/MWh in the coming quarters.

At the beginning of this year, the development of inflation will be noticeably influenced by tax and fiscal measures. On the one hand, temporary measures that were implemented in the wake of the coronavirus and energy crisis to ease the burden on private households (reduction in VAT rates in the catering sector and for gas and district heating, price caps on electricity and gas, etc.) are coming to an end. On the other, measures to meet the need for budget consolidation are likely to have a price-increasing effect (increase in carbon pricing, discontinuation of the federal subsidy for electricity grid fees, increase in air traffic tax). However, inflation-reducing factors such as price declines at the upstream levels of the economy due to lower energy and producer prices on the markets, monetary tightening by the ECB, appropriate wage settlements and normalisation of corporate profit margins will continue to dominate the development during the rest of the year.

USUAL SEASONAL DEVELOPMENT ON THE LABOUR MARKET AT THE END OF THE YEAR

At the end of the year, the labour market showed the usual seasonal development in favourable weather conditions. As usual in December, registered unemployment in unadjusted figures increased by 31,000 compared to the previous month; adjusted for seasonal fluctuations, there was a slight increase of 5,000 people. Employment increased somewhat between October and November (+22,000 persons in seasonally adjusted terms). According to initial estimates by the Federal Statistical Office, it reached a new high of 45.9 million people on average in 2023. The number of jobs subject to social insurance contributions in October rose significantly by +34,000 (seasonally adjusted). Short-time work increased slightly in October; however, short-time work notifications for December fell again. The leading indicators developed slightly better across the board. The number of reported vacancies rose again for the first time since mid-2022. The willingness of companies in Germany to recruit new workers has increased again slightly, particularly in the services sector. The IAB labour market barometer also improved, even though unemployment is likely to rise slightly. The more favourable leading indicators do not yet point to a fundamental reversal of the trend. The outlook is expected to improve in the spring, when the economy is also likely to pick up speed again.

CORPORATE INSOLVENCIES ARE LEVELLING OFF

According to final figures, the number of insolvency filings fell by 4.9% (from 1,557 to 1,481) in October compared to the previous month. Compared to the same month last year, there was an increase of 19.0%. From January to October 2023, the number of corporate insolvency filings was 24.1% higher than in the same period in 2022. The comparatively high increase is due to base effects (historically low insolvency figures until mid-2022 due to coronavirus-related special effects) and a challenging economic environment. Nevertheless, insolvency figures are still slightly below the 2016-2019 average. The gap increased again in October 2023 (September: -4.4 %; October: -9.5 % compared to the respective 2016-2019 monthly average). The number of employees affected by insolvency remains at an elevated level. In October, it was still 54.3% (September: +91%) higher in year-on-year terms. Looking at the year-to-date period (January to October), the increase compared to the same period of the previous year is even around 123% and 46.2% compared to the pre-Covid-19 average for the period from January to October. The expected claims of the creditors resulting from the corporate insolvencies filed increased by around 97% in October 2023 year-on-year and by 95% in the course of 2023 compared to 2022. The figures show that large companies are currently tending to suffer more from insolvencies.
According to the Halle Institute for Economic Research’s Bankruptcy Update, the number of insolvencies is likely to increase slightly by 10.3% in December compared to November. Year-on-year, the number of insolvencies rose by 22.6% (November: +20.9%). This is the highest figure for the month of December since the Halle Institute for Economic Research’s Bankruptcy Update (IWH Bankruptcy Update) began collecting data in 2016. The fourth quarter of 2023 was therefore probably the quarter with the highest number of insolvencies in that year although the fourth quarter normally has the lowest number of insolvencies in a year. According to the IWH, the rise in the number of insolvencies is likely to continue this year.

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^[1] This report is based on data that were available as of 15 January 2024 (10 a.m.). 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.