Industrial activity saw a clear upturn in January (+3.5% m/m), after a significant downturn in December (-2.4% m/m). For example, intermediate goods and construction, which fell sharply in December, returned to a level of production close to that of November.
Business climate indicators show relative improvement (for example, the IFO rose from 84.3 in September 2022 to 91.1 in February 2023), attesting to better than expected business activity, particularly as fears of a worsening energy crisis did not materialise. However, these indicators are still below normal, in line with negative growth in Q4.
Business climate indicators in recent months have been affected by the significant impact of the energy shock, as well as by fears that this shock will get worse during the winter. The difficulties linked to the international context (before China’s economy opened up again) have also hurt the German economy.
Since 2016 China has become Germany’s main trading partner. German imports from China account for almost 12% of Germany’s total trade, and exports account for 8%. Overall, trade with China now accounts for almost 20% of total German trade.While Germany's trade deficit with China has always been relatively modest in the past, it has widened substantially since the start of 2021.Germany, which has a particularly high level of industrial production, has a significant degree of dependence on China for imports of strategic inputs, particularly in relation to its supply of rare earths. The key German industries are also dependent on Chinese domestic demand, because on average around 20% of their sales are made there, and this proportion is continuing to increase
Unexpected to say the least, +0.4% growth in German GDP in the third quarter should not distract from the bigger picture. While the power of the end of catch-up effects surprised the consensus which did not expect such dynamism in activity in the third quarter, there is no doubt that German growth drivers are fading one by one under the weight of an extremely unfavourable economic climate: record inflation, energy crisis, drop in global demand... After a last stand in Q3, it therefore seems unlikely that Germany could continue to post positive growth over the last three months of the year. While Germany’s entry into recession is almost confirmed, the question of how intense it will be is much more up in the air
The economic landscape is not improving much in Germany. November’s economic surveys confirm that the German economy is not just facing a slower pace of growth, but is indeed getting bogged down. Although the country’s composite PMI was up slightly (46.3 from 45.1), it remained at a very low level, well below the theoretical threshold for expansion. On the other hand, activity in services, which had been a key driver for growth in the third quarter, fell significantly with a PMI published at 46.1 in November, down for the fifth consecutive month.
Since the beginning of 2022, German growth has never ceased to surprise by its resistance, driven by the end of post-Covid catch-up effects. However, the deterioration of the economic situation is now such that all the engines of growth are weakening and fading one by one. In terms of consumption, investment and foreign trade, all followed a downward trend in the fourth quarter. It therefore seems unlikely that German GDP will continue to grow in the last three months of the year. Despite this, the recession that awaits Germany in 2023 is expected to be moderate and time-limited due to massive public support.
Against all odds, German GDP grew by 0.3% in the 3rd quarter (q/q). This is very surprising because the Minister for the Economy, Robert Habeck, announced on 12 October that “the German economy should contract in the third and fourth quarters of this year as well as in the first quarter of 2023”. Although the detail of the GDP components is not yet available, the national institute of statistics (Destatis) points out that private consumption would have driven growth in the 3rd quarter.
Though the manufacturing PMI is a good indicator for assessing the dynamics of industrial production over a long period, recent constraints on supply have again highlighted a methodological problem in the index linked to the way it takes delivery times into account. The way delivery time are handled by the manufacturing PMI must be differentiated according to type of shock, so that the index can better reflect industrial activity. We propose a method that will detect the presence of a positive demand shock or a negative supply shock. The manufacturing PMI is then rectified according to the shock. It is also possible to recalculate the manufacturing PMI by a principal components analysis (PCA), based on all questions available in the S&P Global survey
While the government has already put in place a series of measures totalling 65 billion euros (equivalent to 1.8% of GDP), on 29 September Olaf Scholz announced “a double whammy”, to use his own words, with the introduction of measures to help with the cost of energy, up to a maximum amount of 200 billion euros. It is not expected that the entire budget will be used up; initial estimates suggest that half of the maximum budget would be utilised. This large-scale plan (5.5% of GDP) should make it possible to subsidise electricity consumption for households and businesses (around 80% of their usual consumption) and to maintain a reduced VAT rate of 7% on gas until spring 2024.
The question is no longer whether or not Germany will slide into recession, but rather when and to what extent. The surprising resilience of German GDP in the 2nd quarter should not disguise the significantly worse outlook for the rest of the year. With continuing supply constraints, the new risk of energy shortages, rising production costs and high and widespread inflation that severely reduces household purchasing power, Germany is unlikely to avoid a fall in its GDP. However, the extent of the downturn should be limited.
With Gazprom announcing on 2 September that gas deliveries via NordStream1 would be interrupted until further notice due to alleged oil leaks discovered during maintenance work, the increase in deliveries promised by the Russian company via other pipelines (such as those crossing Ukraine) will only marginally compensate for the shutdown of NordStream1. The likelihood of power cuts this winter is increasing even though gas inventories are expected to be replenished in early November.
After 2021, a year when wage negotiations were difficult against a backdrop of a fragile and uneven economic recovery, wage increases should be much higher in 2022 but insufficient to compensate workers for high inflation. The country’s most powerful union, IG Metall, has obtained a wage increase which has not been seen in the metalworking sector for 30 years: +6.5%. However, this increase should be put in perspective, since the agreement covers 18 months, bringing the annual growth rate to +4.5% in 2022. Salary negotiations in Germany are still mostly carried out at a centralised level (by industry or sector). The shift in decentralization in the 1990s mainly enabled enterprises to break out of sectoral agreements in exceptional circumstances (e.g
In May 2022, Germany recorded its first trade deficit since 1991. Due to a much bigger than expected increase in imports (2.7% m/m) and an unexpected drop in exports (-0.5% m/m), the country’s trade balance was negative to the tune of EUR 1 billion. By comparison, Germany was running a monthly trade surplus of nearly EUR 20 billion at the end of 2019. Moreover, this deterioration of the trade balance is likely to continue.
Germany is one of the Eurozone countries hit hardest by the Russia-Ukraine war, which is leading towards feeble growth prospects and high inflation. German GDP is expected to barely increase by 1.3% in 2022, compared to a Eurozone average of 2.5%. Average annual GDP growth will remain 0.9% below the year-end 2019 level. At the same time, inflation is expected to reach 8.1% in 2022, driven up by high energy prices. Between the minimum wage hike promised by the government and expected wage increases in many sectors, wage growth should accelerate strongly in 2022, but may not be sufficient to offset the inflationary shock.
The negative prospects for the second quarter of 2022 are no longer a risk as suggested by business surveys, they are now taking concrete shape in Germany. After the very sharp worsening in the trade balance in March (a 4% decline in exports in volume terms and a symmetrical 4.1% increase in imports), it barely improved in April and remains at an extremely low level. According to the Kiel Institute’s real-time forecasts, exports probably fell in May (-1.7% m/m) but will see a slight recovery in June (0.6% m/m). Over the second quarter as a whole, Germany’s trade balance could shrink to its lowest level since Q2 2001.
The resilience of Manufacturing PMI through to April was surprising, given the extent to which constraints on supply and pressure on input prices have increased since the beginning of the conflict in Ukraine on 24 February. This is particularly true in Germany where, despite an industrial sector with considerable exposure to the shock, Manufacturing PMI remained well above 50 (54.6 in April 2022). This suggests that activity in the sector remained comfortably in the expansion zone, whereas industrial production contracted by 4.4% between January and March 2022. This conflicting message is due mainly to a methodological bias: the inclusion of delivery lags in the aggregate PMI index. This bias may be an issue when the PMI is used as a nowcast for industrial production or GDP growth
Although Germany returned to positive economic growth in the first quarter of 2022 – with GDP up 0.2 % q/q according to the initial estimate published by the Federal Statistical Office (Destatis) – March figures already showed the impact of the conflict between Russia and Ukraine and strict lockdowns in several regions of China. Industrial production, which accounts for 24 % of German GDP, fell sharply in March (by 4.6 % m/m) after almost zero growth in February. Industrial production remains well below its pre-Covid level: in Q1 2022, it was 5.2 % lower than in Q4 2019. Worse, the rapid decline in March created a sharply negative growth overhang for the second quarter (-3 %).
Of the Eurozone’s four major economies, Germany has the least positive growth outlook for 2022. Its economy is expected to grow by around 2% this year, whereas we are forecasting around 3% in Italy and France, and around 5% in Spain. Germany also has a lower Q4 2021 growth carry-over, greater exposure to the economic repercussions of the war in Ukraine, and pre-existing supply-chain problems in its manufacturing industry. The fall in the ifo index in March, particularly the business expectations component, illustrates well these headwinds, and this decline serves as a recession alert.
Although Germany is not the eurozone country experiencing the highest inflation rate, the trend is nevertheless uncomfortable. Consumer prices posted another hefty rise in January (+5.1% y/y, harmonised index), although this was less than in December 2021 (+5.7%). The end of positive base effects – caused by the end of the VAT rate cut in place in the second half of 2020 – did not therefore result in a marked fall in inflation.
The indicators currently available for the end of last year suggest that Germany recorded weak growth at best in Q4 2021: a GDP contraction cannot be ruled out. Industrial orders remained at a relatively strong level, but production continued to be held back significantly by supply problems for certain components.
After strong growth in Q2 and Q3, the business climate deteriorated due to supply problems, the increase in prices and the surge in Covid-19 infections. Output is likely to stagnate around the turn of the year. The new government will put the emphasis on social and environmental policies, while fully respecting the fiscal framework, important for Germany. Private consumption will be the major engine for growth in 2022.
Our Pulse is clearly pointing to bad weather, as the blue area of the spider chart – the economic situation in the past three months – is clearly shrinking compared to the situation in the preceding three months – the area within the dashed line. The deterioration is noticeable in all sectors, with the exception of the construction industry. Ifo reported that the business climate in the manufacturing sector worsened in November for the fifth consecutive month. Industrial activity is dampened by supply bottlenecks and rising input prices. The improvement in expectations, in particular in the car industry, could signal that the shortages of parts in this sector are diminishing.
The German economy further recovered in the third quarter, as GDP strengthened by 1.8% from the preceding quarter. Growth is mainly driven by higher consumer spending related to improved labour market conditions and a further relaxation of sanitary measures. However, our Pulse chart indicates that this favourable environment is unlikely to last: the situation in the three months to October (blue area) worsened compared to the situation in the preceding three-month period (area within the broken line).
After a strong recovery in Q2 and Q3, activity in the coming months could slow due to supply disruptions and sharp rising input prices. After his victory in the legislative elections, Olaf Scholz enters negotiations with the Greens and the liberals on forming a new coalition. The policies are likely to focus on protecting the environment and raising low wages. At the European level, the policies of the new coalition should not be very different from those of Angela Merkel.
The Federal Republic of Germany is a parliamentary republic headed by a chancellor and a president. It comprises sixteen states (Bundesländer). Each state has its own state constitution, and is largely autonomous concerning its internal organisation. The most prosperous states are Bayern and Baden Württemberg in the southern part of the country. GDP per capita in these states are about 15% higher than the German average. The dynamism of the area is largely due to its sector specialisation. Manufacturing production makes up around 30% of production, and is concentrated in hi-tech industries.
With 83 million inhabitants the Federal Republic of Germany is the leading economy in the Eurozone both in population terms and its share of Eurozone GDP (more than one third). GDP per head is 20% above the Eurozone average, making it one of the most prosperous Eurozone countries. Germany is the world’s fourth largest economic power after the US, Japan and China, and the third largest exporter after China and the US.
The manufacturing sector plays a vital role in the economy. It accounts for almost 20% of employment and contributes almost a quarter of total value added. However, industry’s central role makes Germany’s economy more cyclical than some of its neighbours