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Monthly Report: German economy still experiencing weak spell

The German economy is still experiencing a period of weakness. According to the Federal Statistical Office’s flash estimate, in the second quarter of 2023, seasonally adjusted real gross domestic product (GDP) stagnated at the level recorded in the previous quarter. The current issue of the Bundesbank’s Monthly Report reports that weak foreign demand and higher financing costs are weighing on the economy. The large backlog of orders in industry and construction and abating supply bottlenecks prevented an even weaker development. The sound labour market acted as a tailwind for the economy. 

Private consumption buoying economy

Economic output is expected to more or less stagnate again in the third quarter of 2023. According to the Bundesbank’s economists, private consumption is likely to have bolstered the economy. Given stable employment and strong wage growth, as well as declining inflation, the recovery in private consumption is likely to continue, they write. This will also give a boost to the services sector. The consumer climate index calculated by the market research institute GfK improved again of late. Data published by the German Association of the Automotive Industry (VDA) indicate that car purchases might again make a positive contribution to private consumption. Surveys by the ifo Institute, however, suggest that growth in private consumption growth could be weak, as firms in consumer-related sectors, such as retail trade and accommodation and food services activities, assessed their business situation to be worse compared with the previous quarter. 

Industrial output slowing economic development

Weak industrial output is likely to dampen macroeconomic developments in the third quarter. According to the Monthly Report, lower demand for industrial products continued until recently. “The second quarter of 2023 saw industry receive slightly more new orders than in the previous quarter. However, this was solely due to large orders, which are usually processed over a longer period of time. Without these, demand from both Germany and abroad went down steeply,” they write. A slowdown in industrial activity was also indicated in the short-term production plans and export expectations, which had become markedly more pessimistic according to the ifo Institute. A further easing of supply bottlenecks and the large order backlog had a positive impact on industrial output.

Labour market still fairly robust

Despite the stagnant economy, the labour market is proving quite robust. Nonetheless, the Bundesbank reports that the previously fairly rapid pace of employment growth declined markedly in the second quarter and unemployment also rose moderately. Leading indicators suggest that employment will remain stable in the coming months and that unemployment will continue to edge up, the Bank writes. 

Inflation rate still high

The strong rise in seasonally adjusted consumer prices (as measured by the Harmonised Index of Consumer Prices, or HICP) continued into the second quarter, according to the Bundesbank’s Report. In particular, the prices of processed food such as cereals or beverages, non-energy industrial goods and services continued to rise sharply. Energy prices declined again, but not as steeply as at the beginning of the year. In the second quarter of 2023, headline inflation fell from 8.8% to 6.9% year on year. The main reason for this was that energy prices rose sharply in the previous year following Russia’s invasion of Ukraine and that this effect now no longer applies, the Bundesbank’s experts explain. At around 14%, food price inflation is still quite considerably higher than a year earlier, but somewhat lower than in the first quarter. The prices of non-energy industrial goods also rose less sharply than at the beginning of the year.

Looking to the fourth quarter, the experts expect the inflation rate to continue to come down as energy prices fall. Declining price pressures along supply chains and expiring one-off effects, such as the previous year’s temporary relief measures (e.g. the €9 travel ticket), are likely to provide additional relief on the cost side. By contrast, wage growth is likely to remain strong even beyond 2023. “This is a key reason why the inflation rate is likely to stay above 2% even in the longer term,” the Bundesbank’s experts write.