The economic situation in Germany in March 2024

Despite positive trends in industrial output, construction and foreign trade at the start of 2024, a noticeable economic recovery is not yet in sight. This is due to continuing weak domestic demand, high financing costs and the subdued sentiment still present among private households and companies. In their latest forecasts, most economic research institutes expect GDP to fall again in the first quarter of 2024. According to the Federal Statistical Office, production in the manufacturing sector rose by +1.0% in January compared to the previous month. This marks the first noticeable increase in 11 months. Industry and construction both increased their output (+1.1% and +2.7% respectively). By contrast, the energy sector reported a significant decline (-3.7%). As expected, there was a drop in new manufacturing orders in January compared to the previous month (-11.3%). Thanks to large orders, there had been an increase of 12% in December. In a two-month comparison, which is less susceptible to fluctuation, orders were up 5.9%. Excluding large orders, the order volume fell by 2.1%. Real retail turnover excluding motor vehicles fell by 0.4% in January compared to the preceding month, resulting in the third consecutive downward development. Year-on-year, the retail sector experienced a real sales decline of 1.5% in January. Overall, the leading indicators are largely moving sideways and only at a very low level. Inflation stood at 2.5% in February, its lowest rate since June 2021. This was down from 2.9% in January. This means that inflation has been trending downwards since March 2023. At 0.9%, year-on-year inflation on food was at its lowest since December 2020. Since the outbreak of the war, the price increase had remained disproportionately high. Consumer prices for energy were 2.4% lower in February than in the same month of the previous year despite the fact that the energy price brakes had been lifted and the price of carbon raised in January 2024. The labour market continues to prove robust overall considering the period of economic weakness, but remains ambivalent: although unemployment rose slightly, up by 11,000 people in February, employment and employment subject to social insurance contributions also increased significantly in January and December. The leading indicators deteriorated somewhat, but demand for labour remains high. The Halle Institute for Economic Research’s Bankruptcy Update shows an increase in corporate insolvencies of 10.8% (+1,193) for February 2024 over the previous month (same month of the previous year: +43.2%). According to the Institute, this is the highest figure since it began collecting data in 2016. It expects insolvency figures to continue to rise in the coming months.

Spring recovery delayed

Following the weak last quarter of 2023, there are still no signs of a noticeable economic recovery in the German economy at the start of 2024. Industrial production and – given the favourable weather – construction both showed a positive trend at the start of the year. German trade in goods, particularly exports, also started the new year with significant growth. However, these developments represent in part a rebound from the significant declines at the end of 2023.

At the same time, new manufacturing orders – excluding the high monthly fluctuations caused by large orders – continued to decline in January and retail sales also fell again at the start of the year. Sentiment-based leading indicators do not yet point to a sustained reversal of this trend, with the ifo Business Climate recording that the mood in companies brightened slightly in February. Companies are more positive about the outlook for the coming months but their assessment of the current situation remains at a low level. As a result of longer delivery times following the attacks on ships in the Red Sea and the strike by German railway workers, shortages in the supply of materials have also increased again somewhat according to figures from the ifo Institute.

Sentiment among private households in Germany, as reflected in the GfK Consumer Climate Survey and the HDE consumer barometer, has recently shown signs of bottoming out. However, the propensity to buy remains at a low level despite the rise in income expectations, while the propensity to save has reached its highest level since June 2008.

As indicators in general are remaining weak and there continues to be a high level of uncertainty among households and companies, most economic research institutes are expecting a further slight decline in gross domestic product in their latest economic forecasts for the first quarter of 2024. A noticeable economic upturn is not expected until later in the year as inflation rates continue to fall, wages and incomes rise, the labour market remains stable and impetus from foreign trade increases.

Global demand appears to be normalising

In December, global industrial output increased by +0.5% compared to the previous month, up 2.5% on the previous year. The global industrial economy, which was weak last year due the uncertainty caused by geopolitical conflicts, the lingering effects of interest rate hikes and the expiry of pandemic-related support measures, appears to be slowly stabilising. The purchasing managers’ indexes in key German trading partners have also brightened somewhat, e.g. in the USA and the eurozone. In many places, however, they do not yet signal a sustained economic recovery. The sentiment indicator published by S&P Global continued its upward trend in February and, at 52.1 points, is now above the growth threshold of 50 points. Sentiment in the manufacturing sector improved (rising from 50.0 to 50.3 points) and service providers are also somewhat more optimistic about the future (up 0.1 points to 52.4 points). Global demand therefore appears to be normalising further.

Global trade increased by 1.0% in December compared to the previous month, following an interruption in the upward trend in November. Current leading indicators are pointing to a further stabilisation of global trade. The RWI/ISL Container Throughput Index rose in January from 125.7 to 126.5 points (adjusted for seasonal effects), although this was exclusively on account of Chinese ports, where the index is distorted by the Chinese New Year. In all other regions of the world, there was a decline, which was also seen in the North Range Index for European ports. This fell from 101.5 to 99.4 points, which is probably mainly due to the attacks in the Red Sea which are causing many cargo ships to take a diversion around Africa.

Global trade is expected to recover over the remainder of the year. Once the inventory corrections have been completed and demand, which had shifted from goods to (less trade-intensive) services following the pandemic, has normalised, global trade is likely to increase again at similar rates to value added.

Rays of hope in foreign trade, but no turnaround yet

After a setback in December, nominal exports of goods and services rose again significantly in January compared to the previous month (+3.7%, December: -5.0%), adjusted for seasonal and calendar effects. The growth in goods exports was mainly thanks to trade with EU countries (+8.9%), but exports to non-EU countries also increased (+3.1%). Nominal imports of goods and services also increased again slightly following a noticeable decline in December (+1.1%, December: -6.3%). This recovery was driven by trade in goods with EU countries, where imports increased by 10.8% month-on-month. In trade with third countries, they fell by 4.5%. The monthly trade surplus increased from €19.6 billion in December to €23.9 billion in January (adjusted for seasonal effects) as a result of the stronger increase in exports compared to imports.

Current leading indicators are sending cautiously positive signals of a stabilisation of foreign trade. Ifo export expectations brightened slightly in February (up from -8.5 points to -7.0). While export expectations improved in the electrical industry, they remained subdued among the major automotive manufacturers; in mechanical engineering, they even fell to their lowest level since June 2020. New orders from abroad are showing signs of bottoming out, despite high fluctuations; despite the sharp decline in January compared to the previous month (-11.4%), they were up 2.2% in the less volatile three-month comparison. Orders from the eurozone were up by as much as 9.7% from November to January compared to August to October 2023.

After a setback in German foreign trade in December, growth in exports and imports in January is pointing in a positive direction. The recent cautiously positive signals from the leading indicators support the expectation of a moderate recovery in exports over the course of the year. However, risks remain due to ongoing geopolitical tensions and an economic slowdown in key German trading partners such as China.

Rise in production at the start of 2024

Production in the manufacturing sector increased by 1.0% in January compared to the previous month (after adjustment for price and seasonal effects) – the first noticeable increase in eleven months. Industry increased its output for the first time since May 2023, climbing 1.1%. The construction industry also recorded higher production, up 2.7%, following successive declines in the previous three months. In contrast, energy production fell by 3.7% following an upward trend in the final quarter of 2023.

Within industry, the individual sectors saw very differing developments. Significant increases in production were recorded in chemical products (+4.7%), food and animal feed (+5.9%), electrical equipment (+1.0%) and the manufacture of machinery and equipment (+0.7%). By contrast, output in the large sector of vehicles and vehicle parts was considerably down (-7.6%). The production of metal products (-1.6%) and pharmaceutical products (-0.6%) was also lower.

New manufacturing orders fell markedly in January (after adjustment for calendar days, price and seasonal effects) compared to the previous month (-11.3%), following a strong increase in December (+12.0%). There were significantly fewer orders both from the domestic market (-11.2%) and from abroad (-11.4%). In the eurozone, the figure was down -25.7% following an above-average increase in December (+34.3%) triggered by large orders; if these are excluded, there was an overall decline of 2.1% (December: +0.9%). Demand from other countries expanded slightly, up +1.6%.

The fall in new orders at the beginning of the year affected many different sectors of manufacturing. It was particularly evident in electrical equipment (-33.2%), metal products (-14.5%) and pharmaceutical products (-9.4%). The large sectors of machinery and equipment manufacture and chemical products also saw a decline in new orders (-4.7% and -0.3% respectively). By contrast, there were increases in orders of motor vehicles and vehicle parts (+4.2%), especially from outside the eurozone.

Leading indicators such as the Truck Toll Mileage Index and sentiment indicators including the ifo Business Climate Index and the industrial purchasing managers’ index (EMI) suggest that the industrial economy is gradually bottoming out, but not yet showing any noticeable recovery.

Disappointing start to the year for retailers

Real retail turnover excluding motor vehicles fell by 0.4% in January compared to the preceding month, resulting in the third successive downward development month-on-month. Compared with the same month last year, the retail sector reported a real drop in sales of 1.5% in January (December: -0.7%). Trade in foodstuffs developed positively, with growth of 1.3% in real terms compared to the previous month (down -0.2% compared to the same month in the previous year). Online and mail-order trade increased by +1.9% in January (compared with -3.2% in the same month of the previous year).

New car registrations by private individuals increased by 2.3% in February compared to the previous month (January: -17.0%). New car registrations fell by 5.4% overall in February and by 3.6% in the more meaningful two-month period. The leading indicators for the future development of consumer spending currently paint a rather subdued picture: according to the GfK forecast, the consumer climate is set to rise slightly in March, when it will climb to -29.0 points, having recorded its lowest value in February since March 2023 (-30.6 points). The outlook features a sharp rise in income expectations, whilst the propensity to save will continue to be high. The figure for February was -29.6 points (-4.2 points compared to the previous month). The ifo retail business climate (incl. motor vehicles) fell by -1.0 points in February to its lowest level since November 2022 and remains pronouncedly negative (-27.6 points). The assessment of the current situation has deteriorated for the third time in a row, while expectations have risen slightly.

Overall, the leading indicators are largely moving sideways and only at a very low level. In view of the negative sentiment, a turnaround in the retail sector is not yet in sight. However, with rising wages, falling inflation rates and a robust labour market situation, private consumption is likely to recover over the rest of the year.

Inflation continuing to fall significantly

Inflation (year-on-year rise in the price level) sat at 2.5% in February, its lowest rate since June 2021. The core rate (excluding energy and food) remained unchanged at 3.4%. The rate of inflation for foodstuffs recorded its lowest year-on-year rise since December 2020, at 0.9%. Since the outbreak of the war, increases in food prices have remained disproportionately high (Jan.: +3.8%). Energy prices fell again compared to the same month last year, most recently by 2.4% (Jan.: -2.8%). In the services sector, inflation remained unchanged at +3.4%.

The upstream stages of the economy are also seeing less price pressure. Producer prices fell by 4.4% in January 2024 year-on-year. In December, they were down -5.1%. The decisive factor in this fall was the drop in energy prices. Producer prices rose slightly in January compared with the previous month, up 10.2%. Import prices in December were 8.5% lower than in the same month of the preceding year (-1.1% month-on-month). Wholesale sales prices fell by 3.0% year-on-year in February and were down -0.1% compared with January.

Natural gas prices on the spot markets recently fell again. Currently, the TTF Base Load stands at around €25/MWh, just under 50% down on the previous year’s level. Compared to the previous month, it declined by 3.4%. Market expectations suggest that natural gas prices will remain around €30/MWh in the coming quarters.

Against this backdrop, inflation-reducing factors in the form of price declines at the upstream levels of the economy, lower energy prices, monetary tightening by the ECB, appropriate wage settlements and the normalisation of corporate profit margins are likely to persist during the rest of the year.

Unemployment rises slightly, employment continues to increase

The labour market remains robust overall in the face of the economic downturn. Registered unemployment rose in February by 11,000 in seasonally adjusted terms, continuing the trend seen in the preceding months. Refugees are no longer having an impact on the overall figure. Employment rose sharply in January (+54,000 in seasonally adjusted terms). In December, the number of jobs subject to social insurance contributions rose by 19,000 (seasonally adjusted). In the same month, cyclical short-time work remained at around 180,000. Leading indicators were weaker in February. According to the ifo Employment Barometer, companies’ willingness to hire has once again declined. The IAB labour market barometer, on the other hand, stagnated – offering a slightly better outlook for unemployment balanced by a somewhat weaker outlook for employment.

The number of vacancies registered with the Federal Employment Agency (BA) fell noticeably in February. In view of the shortage of skilled labour, however, this could partly be because companies do not believe they will be able to fill their vacancies. The latest publication of the IAB Job Vacancy Survey shows that demand for labour remains high, with a total of around 1.7 million job vacancies indicated for the fourth quarter of 2023. Overall, the labour market remains divided. Employers are retaining their employees, so the risk of becoming unemployed is low. At the same time, it is becoming more difficult for jobseekers to find a job. A recovery is not expected until the economy picks up later in the year.

Corporate insolvencies continue to rise

The Halle Institute for Economic Research’s Bankruptcy Update shows a noticeable increase in insolvencies of partnerships and corporations of 10.8% (+1,193) for February 2024 over the previous month. According to the Institute, this is the highest figure since it began collecting data in 2016. It is around 42% higher than the same month of the previous year and around 28% above the February average for the years 2016 to 2019. According to data from the Halle Institute, the number of employees affected (largest 10% of companies) fell slightly compared to January, but is still almost 90% higher than the February average for the years 2016-2019. The Institute expects insolvency figures to continue to rise in the coming months, albeit not at the dramatic rate seen in the first half of the 2000s, when the figure was up to 2,000 each month.

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This report is based on data that were available as of 14 March 2024. 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.