Industrial hall

Bundesbank expects economic recovery to take breather in fourth quarter

There was a steep rise in economic output in Germany in the third quarter of 2021, the Bundesbank writes in its Monthly Report. According to the Federal Statistical Office’s flash estimate, gross domestic product (GDP) was up by 1.8% on the quarter, “which is still 1.1% short of its pre-crisis level in the fourth quarter of 2019” according to the experts. This recovery was buoyed by strong growth in the services sector. On the other hand, industrial output continued its downward movement. Despite high demand, it fell distinctly by 2½% on the quarter. The automotive industry, the output of which once again dropped considerably (-13¾%), was hit particularly hard, the main factors being the renewed intensification of supply bottlenecks for intermediate goods and commodities.

Strong catch-up effects in private consumption

The Bundesbank writes that: “On the demand side, private consumption was the main driver of growth for the recovery in the third quarter”. Strong catch-up effects made themselves felt owing to the easing of many containment measures. Accommodation and food services showed strong sales growth, in particular, but bricks-and-mortar retailers of textiles, clothing and footwear, as well as information and communication technologies, also reported robust sales growth. On the other hand, exports fell considerably despite persistently high foreign demand. Supply problems in the industrial sector are likely to have contributed the most to this, according to the experts.

Labour market recovers but loses steam

According to the Monthly Report, the labour market saw a substantial recovery in the third quarter, but has been losing steam recently. Overall employment was up by 0.4% on the quarter. Nonetheless, only around one-half of the jobs lost during the coronavirus crisis had been re-staffed by the third quarter, according to the Bundesbank. That said, the situation looks considerably better for jobs subject to social security contributions. One reason is that, as they could be supported by the use of short-time work, their numbers fell by comparatively little in the crisis. Another is that the jobs being filled during the current recovery are primarily those subject to social security contributions. The report continues by saying that short-time working was massively scaled back during the third quarter. However, the experts are not expecting the situation on the labour market to continue to improve to the same extent over the next few months.

Planned intervention in wage structure worrying

The Bundesbank takes a critical view of the mandated minimum wage of €12 per hour that has been mentioned in the coalition talks. “Such a political objective threatens to undermine the independent Minimum Wage Commission.” The significant minimum wage increase would affect the lower wage brackets markedly and would have non-negligible spillover effects on the wage brackets higher up.

Consumer prices set to rise temporarily by just under 6% in November

The experts write that prices saw a further substantial rise in October, having picked by 0.5% on the month after seasonal adjustment. Energy, in particular, became considerably more expensive. Headline year-on-year inflation rose from 4.1% in September to 4.6%; core inflation – excluding energy and food – increased from 2.5% to 2.8%. The Bundesbank believes that the inflation rate will rise to just under 6% in November but go back down perceptibly in January once statistical one-off effects (especially the VAT base effect) wear off. However, “it could remain significantly above 3% for an extended period of time.

Delivery problems likely to remain a drag on growth

The experts are expecting the economic recovery to take a breather in the fourth quarter. The industrial sector is likely to continue to suffer from delivery problems, which will thus probably be a drag on macroeconomic growth. The Monthly Report explains that, according to surveys by the ifo Institute, business expectations became markedly gloomier, with the exception of the construction sector. Throughout the final quarter of 2021 and the first quarter of 2022, developments will be subject to risks relating to an intensification of the pandemic. “As things stand, however, the macroeconomic effects will probably be less severe than in previous waves of the pandemic,” the experts write.