Steel production ©dpa

Monthly Report: Economy off to sluggish start in Q3

The German economy got the third quarter off to a sluggish start, too. “This was due primarily to export-oriented industry,” according to the current issue of the Bundesbank’s Monthly Report. Industrial production continued its slump in July, with production figures down significantly on the month. Though the timing of the summer holidays played a certain role in this respect, it was not the main factor behind the continued slackening in production. According to the report, the manufacture of cars and car parts fell particularly sharply. However, the German Association of the Automotive Industry (VDA) states that the number of cars manufactured rebounded strongly in August.

GDP could have contracted slightly once again

In the experts’ assessment, the situation on the German labour market has remained good, with the number of persons in employment up in July by 14,000 on the month after seasonal adjustment. In conjunction with the optimistic outlook for consumers’ income, this fuelled private consumption. Construction activity has continued to flourish as well. Persistently high equipment utilisation and the extent of orders in the main construction industry indicate that this will remain the case for the time being. According to the Bundesbank’s experts, however, it is uncertain whether these cyclical upward forces have been strong enough to form an adequate counterweight to the slumping industrial sector. As they write in the report, “GDP could once again have contracted slightly in the third quarter”.

No cause for concern just yet

As things currently stand, the experts do not believe that a potential contraction in GDP in two consecutive quarters represents cause for concern just yet. Viewed in isolation, they say that such a situation does not necessarily represent the end of the period of aggregate expansion, as in this case the contraction in economic activity has been confined largely to industry. Moreover, from today’s vantage point, only a slight decline in GDP is to be expected overall, even including the second quarter. “Such a decline should currently be seen as part of a cyclical return to normality as the German economy emerges from a period of overheating,” according to the experts.

Risks from global environment

However, the experts still see risks to German economic activity, especially caused by the global environment. They see heightened geopolitical or trade tensions potentially extending or exacerbating the downturn, especially in German industry, which is heavily reliant on export business. This would also heighten the risk of hampering economic activity in Germany across multiple sectors. “It is still unclear whether industrial activity will recover before the downturn spills over to more domestically oriented economic sectors,” according to the experts.

Food and services more expensive

The current issue of the Monthly Report also addresses developments in consumer prices, which fell slightly in August after seasonal adjustment. “One reason for this was energy prices, which continued to fall on the back of lower crude oil prices,” as the experts put it. Non-energy industrial goods were also cheaper. On the other hand, food prices surged considerably once again, while prices for services also picked up slightly.