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German economy brightening slightly, but in its fundamentals still weak

Real gross domestic product is likely to have increased again slightly in the first quarter of 2024, according to the April Monthly Report. The somewhat higher level of industrial output and a rise in goods exports are supporting the German economy. In addition, unusually mild weather in February led to exceptionally strong growth in construction output. However, industrial output remains weak in many economic sectors, and construction output is likely to fall again significantly without the supportive weather effects, the authors write. Overall, there is still no sign of a sustained improvement for the German economy, and headwinds still persist from various directions. Higher financing costs and heightened economic policy uncertainty are dampening business investment. Demand for German industrial products is still weak domestically and abroad and is continuing to trend downwards. According to the Bundesbank, the negative trend in demand for housing construction continued unabated. 

It is therefore not yet clear whether the increase in economic output will continue in the second quarter. However, the sentiment among firms, especially business expectations as surveyed by the ifo Institute, has recently shown a marked improvement. 

Industrial output somewhat higher despite weakness in demand 

According to the Monthly Report, industrial output improved somewhat in February 2024, but there are no signs yet of a far-reaching recovery. Compared with the previous month, seasonally adjusted industrial output rose for the second consecutive month. Output in energy-intensive industries, in particular, went up significantly in January and February. Production of motor vehicles likewise recorded a marked increase in February, the Bundesbank’s economists write. However, averaged across January and February, it remained below the average of the fourth quarter of 2023. Other important sectors, such as mechanical engineering, also fell short of the previous quarter’s average. 

Whilst order backlogs still supported production, industrial new orders in February remained roughly at the low level of the previous month and, excluding volatile large orders, actually declined even further.

Both new orders from abroad and domestic demand remained below the previous quarter’s average, the authors write. By contrast, the recovery in the intake of orders in energy-intensive industries, particularly in chemicals, continued. 

Little sign of recovery in the construction sector

An unusually mild February resulted in exceptionally strong construction output for the time of year, but the general demand situation remains weak, according to the Report. In January, new orders received by the main construction sector remained close to their lowest point of the last two years. In housing construction, they even fell to a new all-time low. Although sentiment also brightened somewhat in the main construction sector recently, ifo business expectations improved only slightly compared with other sectors and remained at a very pessimistic level. 

Labour market remains robust

After seasonal adjustment, employment increased by 16,000 persons in February, which was significantly weaker than the previous month. Based on the latest projection by the Federal Employment Agency, the number of employees subject to social security contributions in the health and long-term care sector rose particularly strongly in January. In addition, employment rose in the public sector, the transportation and storage sector, and the hotel and restaurant sector. By contrast, staff levels declined in temporary agency employment and the manufacturing sector.

Registered unemployment rose slightly in February, by 5,000 persons in seasonally adjusted terms, following an increase of 11,000 persons in February. The number of persons registered as unemployed rose to 2.72 million in February, which corresponds to a rate of 5.9%. The employment outlook for the coming months is stable overall. The outlook for the next few months has brightened further slightly, the Bundesbank experts write.

Inflation rate down further in March

March saw consumer prices as measured by the Harmonised Index of Consumer Prices (HICP) fall on the year from 2.7% to 2.3%. This was mainly due to the lower year-on-year rise in prices for food and industrial goods. Prices for services saw further above average increases. Core inflation, i.e. excluding energy and food, fell to 3.2% and thus remains at an above-average level. The experts expect the inflation rate to fluctuate sharply over the coming months as various base effects such as that of the “Deutschlandticket” expire. The recent rise in oil prices and strong wage growth are likely to push the inflation rate back up.