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German economy’s recovery is stalling

Real gross domestic product will probably decline again slightly in the first quarter of 2024, according to the March Monthly Report. The German economy continues to experience headwinds from various directions. Domestic and foreign demand for German industrial products went down further. In addition, higher financing costs continued to dampen domestic demand. Bundesbank economists believe that economic policy uncertainty about the future direction of transformation and climate policy is also likely to have weighed on economic activity. Moreover, enterprises increasingly perceived economic policy framework conditions, such as the growing burden of bureaucracy and regulation, as a barrier. The declining sickness rate and the mild weather in February had a bolstering effect on the economy. However, the still depressed survey indicators currently provide little evidence of an economic recovery for the second quarter. 

According to the Monthly Report, industrial output improved in many sectors in January 2024 and was slightly up on the month after seasonal adjustment. Compared with the final quarter of 2023, however, industrial output contracted across all sectors in January 2024. Production of motor vehicles saw a particularly significant fall, the Bundesbank's economists write. The short-term outlook is rather gloomy, as weakness in demand persists. Industrial new orders dropped sharply in January, which was probably due mainly to fewer orders from abroad. There were positive developments for nominal exports of goods in January, with a significant rise being recorded compared with the fourth quarter of 2023. Given the persistent weakness in demand, the sustainability of this positive trend remains to be seen.

Private consumption still weak 

According to the economists, private consumption will probably increase only “tentatively” at most in the current quarter. Consumers are still unsettled and reluctant to spend, even though their scope for spending is generally improving on the back of falling inflation and a steep rise in wages. Price and seasonally adjusted sales declined in the retail sector in January and were below the level of the fourth quarter of 2023. The expiry of the environmental bonus for private electric vehicles led to certain anticipatory effects in December 2023 and a sharp decline in electric car registrations in January. Only the hotel and restaurant sector managed a slight increase in sales recently. According to surveys by the ifo Institute, the business climate in consumer-related services sectors continued to deteriorate. 

Labour market remains robust

The report states that the labour market remains robust in the period of weak economic growth that has now persisted for some time. Seasonally adjusted employment increased by 54,000 people in January, roughly twice as much as in the previous month. In particular, there was a marked increase in employment in business services and in the area of healthcare and long-term care. Furthermore, employment rose markedly in the public sector, in energy and water supply, and in the hotel and restaurant sector. By contrast, the number of staff in temporary employment, trade and industry decreased. 

Registered unemployment rose slightly in February, by 12,000 persons in seasonally adjusted terms, after remaining unchanged in January. The number of people unemployed rose to 2.71 million in February, which corresponds to a rate of 5.9%. As in previous months, the outlook for the next few months has brightened slightly. The economists believe that unemployment may therefore increase only slightly in the next three months. 

Inflation rate continues to decline

February saw consumer prices as measured by the Harmonised Index of Consumer Prices (HICP) fall on the year from 3.1% to 2.7%. This was mainly due to the decline in the costs of food, energy and non-energy industrial goods compared with the previous year. Prices for services saw further above average increases. Core inflation excluding energy and food held roughly steady at 3.5% in February. 

The economists expect the inflation rate to trend down in the coming months, writing that while price pressures for food and non-energy industrial goods can be expected to decline markedly, a much slower disinflation process is anticipated in the services sector. Current strong wage growth is, they note, likely to contribute to a slower decline in the inflation rate.