According to the latest business climate and household surveys, the German economy is unlikely to rebound for some time yet. In November, the IFO business climate index (85.7) has returned to a level close to its level in September (85.4, its lowest level since May 2020), following a one-off rebound in October (86.5). This return to a low level is mainly explained by the services index in an uncertain political context, with the ousting of Finance Minister C. Lindner suddenly sending Germany into a pre-election period (early elections scheduled for 23 February 2025).
At the same time, growth in negotiated wages accelerated sharply in Q3 (hourly pay up 8.8% y/y), following a fairly lengthy negotiation process (biennial, whereas it is annual in France), and therefore compensating, with a delay, for wages impacted by inflation. This increase in nominal wages could buoy consumption, but this effect is likely to be moderate. Indeed, the household confidence index fell sharply from -18.3 in October to -23.3 in November. This is well below its pre-inflationary crisis level (-6.9 in February 2022 and +5.3 on average between 2001 and 2021).
This fall in household confidence is due to the clear downturn in the labour market, with the IFO's employment climate index at 93.7 in October (the lowest since November 2005, excluding the 2008 recession and COVID crisis periods) and net job losses of almost 76,000 over the last four months. On the negative side, inflation rose to 2.4% y/y in October (harmonised index) from 1.8% in September, and inflation in services even hit 4.8% (from a low of 3.4% y/y in December 2023).
The GDP data shows that the economy has been stagnating for around three years. GDP for Q3 2024 is close to its level in Q4 2021. Growth in Q3 has been revised to 0.1% q/q (from 0.2% in the first estimate), driven by consumption (private and public), but dragged down by exports and investment. Based on our forecast of 0.3% for Q4 2024, the German economy is expected to have contracted slightly in 2024 (-0.1%), as was the case in 2023.
Article completed on 27 November 2024
