Economic surveys pointed once again to a downturn, including the ifo Business Climate Index (88.5 in June compared to 93.4 in April) and the ZEW Indicator of Economic Sentiment (-14.7 in July compared to 28.1 in February). The erratic momentum of factory orders, which were up 6.4% m/m in May (after a low point in April 2023 not seen since May 2013), underlines one of the constraints at work: the irregularity of activity in transport equipment, which remains subject to sporadic supply difficulties. This phenomenon is generating high volatility in production, both in the aeronautics sector and the automotive sector (lower in April with an upturn in May, as also seen in France).
Germany experienced a technical recession in Q4 2022 (-0.5% q/q) and in Q1 2023 (-0.3% q/q), driven by a contraction in household consumption (-1.7% then -1.2%). Although the main cause of this recession was not its industrial core, the German economy showed signs of weakness which hindered growth. While disinflation should allow household consumption to recover in Q2, economic surveys however, are pointing to a further deterioration, which once again exposes the German economy to a risk of recession in H2.
While it might have been hoped that the current drop in inflation would provide a stronger boost to household confidence, this, and consequently consumption, remains constrained. This is due to the impact of rising interest rates on purchasing intentions in both France and Germany.
Business climate indicators in Germany have deteriorated in recent months, including the IFO survey (91.7 in May, 5 points below its long-term average, compared to 93.4 in April) or the ZEW index. The latter recovered slightly in June (-8.5 compared to -10.7 in May) but remained very negative and continued to deteriorate in most industrial sectors, as a result of a fall in demand (the current situation index fell at the same time from -34.8 to -56.5 between May and June).
The German economy experienced a recession during Q4 2022 and Q1 2023. Even though consumer spending has significantly contributed to this downturn, growth has been underperforming in Germany for over five years, largely driven by the underperformance of its manufacturing sector. Industry has been facing stronger constraints than elsewhere in Europe, and its size has decreased, which is a relatively new phenomenon in recent times in Germany. The country is still going through this tough patch for industry, which could cause German growth to fall again during the second half of the year.
Industrial activity and new industrial orders experienced sizeable variability in Q1, with a strong rebound in January-February followed by a sharp drop in March. Overall, new orders remained stable during the first quarter (q/q). The IFO survey has even deteriorated in May, and the ZEW index has returned to negative territory.
New factory orders in the industry fell sharply in Germany in March, after a fairly significant increase in February. Overall, these developments are offsetting each other. A very moderate increase over Q1 (0.2% q/q) is consistent with GDP growth, published at 0% q/q for Q1.
Growth in industrial activity observed in January and February suggests more than a technical rebound correcting the downturn seen in December. Some sectors, such as metals, have seen recovery in Q1 2023, compared to a difficult Q4 2022. Conversely, transport equipment showed a growth carryover for Q1 2023 of +6.2%, after an already strong increase in Q4 2022.
Germany is the Western European country where GDP growth was the most negative in Q4 2022 (-0.4% q/q). Furthermore, economic indicators, although improving, remained relatively downgraded weak at the beginning of 2023. A further contraction in GDP in Q1 2023 therefore remains our central scenario. However, more favourable signals (peak inflation exceededslight disinflation, reopening of China, reduced supply shortages in the automotive sector) could lead to a return to growth from Q2. This has already been reflected in household confidence, although the weakness of growth in the euro area, since Q4 2022, could limit the intensity of this recovery.
With a peak in inflation last autumn and fears of energy shortages during the winter, the IFO’s index hit an historic low in October 2022. This index has recovered to normal levels, as winter turned out better than had been feared. However, following the poor performance of Q4, all signs point to this being just a “technical” rebound in activity.
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 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
