The underperformance of German growth in recent years continued in 2023. However, even though it is no longer a driving force, the German economy is seemingly benefiting from the recovery seen elsewhere in the Eurozone, which could boost its growth in the coming quarters. This was reflected in a relatively good performance (0.2% q/q) in Q1, which, like the Eurozone's performance (0.3% q/q), surprised on the upside. The business climate (IFO) shows an improvement, albeit still partial, with an index of 89.3 in both May and April, making them the best two months since May 2023.
The German economy is more dependent than its European partners on sectors that have suffered shocks and are still under-producing. However, these sectors also have the potential to bounce back. For example, output in the chemical/pharmaceutical sector, which has been negatively affected by the rise in energy costs, was almost 7% lower in February-March 2024 than in March 2022, but 7% higher than its average value in 2023. In addition, Germany remains an open economy. Exports of goods and services account for 50% of its GDP (compared with 32% in France), so the country will benefit from the rebound in European growth. While exports have already driven growth in Q1, new industrial orders underline that this should continue to be the case: with an average index level of 93.6 over the last 6 months for orders from the Eurozone, compared with 83.6 for the German domestic market (base 100 in 2021).
Although domestic demand was again lacking in Q1, it should be supported by a labour market that remains vigorous (59,000 net new jobs in Q4 and 26,000 in Q1). However, despite the disinflation seen in recent quarters, and the prospect of interest rate cuts by the ECB, there is still only a partial improvement in household confidence (-20.9 in May 2024, compared with -24.2 in April, but still 13 points below the March 2022 level), suggesting that this support should remain moderate. This confirms that Germany is not playing a leading role in the improvement in European growth (French exports to Germany continued to contract in Q1).
Article completed on 29 May 2024
