Cranes against a blue sky in the port of Hamburg ©robertdering / Adobe Stock

Bundesbank not expecting slight economic recovery until beginning of 2024

The German economy is still navigating through choppy waters, write the Bundesbank’s experts in the November Monthly Report. According to the Federal Statistical Office’s flash estimate, gross domestic product (GDP) fell by a seasonally adjusted 0.1% in the third quarter of 2023 compared with the previous quarter. Industry was still suffering from the consequences of the earlier energy price shock and weak foreign demand. Increased financing costs continued to dampen private investment, thereby also weighing on domestic demand for industrial goods, and, in particular, construction work. In industry, output even in sectors that had previously bolstered activity, such as the automotive industry, also fell steeply. According to the ifo Institute, the share of industrial firms complaining of insufficient demand has continued to grow significantly and now stands at 36%. 

Households’ mood for spending remained subdued

Private consumption likewise probably remained lacklustre in the third quarter. Despite strong wage increases, declining inflation rates and stable employment, consumers still held back on additional spending, the experts report. Price-adjusted sales fell in almost all areas of the retail sector. By contrast, the services sector (excluding trade) proved to be quite robust in this difficult environment. 

Labour market still stable

The robust labour market continued to stabilise economic activity in Germany, according to the Monthly Report. Despite the slight decline in economic output, employment in the third quarter remained at the high level recorded in the previous quarter. After seasonal adjustment, average total employment for the third quarter exceeded the level of the previous quarter by just 8,000 persons (+0.0%). Unemployment rose moderately, but somewhat more sharply in October, with the unemployment rate at 5.8%. The number of job vacancies was still very high, however. This means that the still very tight labour market – expressed by the ratio of vacancies to unemployed persons – eased only slightly, write the economists. As the employment outlook remained stable in October, the Bundesbank does not expect a notable decline in employment in the fourth quarter, either.

Negotiated wages up substantially in third quarter

Negotiated wages rose substantially in the third quarter of 2023, climbing by 4.7%, thus recording stronger growth than in the second quarter (+3.9%). This was due not only to large social contribution-exempt inflation compensation bonuses, but also to the fact that higher permanent wage increases were included in the more recently concluded wage agreements. And the demands remain high: unions are aiming for steep wage growth for the other sectors in negotiations in the fourth quarter, too.

Inflation rate continued to fall significantly in October

In October, consumer prices as measured by the Harmonised Index of Consumer Prices (HICP) fell by a seasonally adjusted 0.2% on the month, having risen by 0.3% in September. This was mainly due to lower energy prices, but food and services inflation also eased. The inflation rate was down again considerably on the year, from 4.3% to 3.0%. In a year-on-year comparison, inflation was dampened by an energy price-related base effect, in particular. The core rate (excluding energy and food) therefore decreased less sharply, from 4.8% to 4.2%. However, it remains far above the historical average and exceeds headline inflation, the authors write. In their assessment, the inflation rate is likely to hover around its current value in the coming months. 

Slight recovery not expected until start of next year

The German economy is set to recover only arduously from the period of weakness that has persisted since the outbreak of Russia’s war against Ukraine, the experts went on to explain. They do not expect economic output to see slight growth again until the first quarter of 2024. Households’ real net income is anticipated to rise further on the back of high wage rises and easing price pressures. Even if households remain somewhat cautious in their spending, they will gradually expand their real consumption, thereby supporting domestic economic activity. 

The industrial sector is still up against difficult conditions. According to the Monthly Report, weak foreign demand and the consequences of the earlier energy price shock are continuing to curb its output. However, the Bundesbank sees that tentative signs of a slight improvement after the turn of the year are beginning to emerge. For instance, the underlying trend in new orders suggests that foreign demand may have bottomed out. Furthermore, firms’ business expectations as surveyed by the ifo Institute have brightened slightly of late.