The business climate in Germany (PMI and IFO surveys) deteriorated steadily from its peak in May to September. The relative optimism of the spring has ebbed away, as illustrated in particular by the deterioration in the PMI for export conditions (standing at 49.8 in September, compared to 51.9 in May). As a result, while our forecast for Q3 growth remains at 0.1% q/q, the German government has highlighted the risk of another negative figure (following the rate of -0.1% q/q in Q2 already) and therefore of a recession. Overall, GDP is likely to be close to its level recorded at the end of 2021 (i.e. three years of stagnation).
However, the surveys are beginning to anticipate improvement again (both the PMI surveys and the October IFO), linked to the ECB's policy rate cuts, which, this time, perhaps are more likely to materialise. Indeed, the decline in industrial production (-5% y/y over January-July 2024) was partly due to a lack of demand, but also to production difficulties in the automotive sector. However, these difficulties have seemingly eased (supply constraints limited the production of 7% of companies in the sector in Q3, compared with an average of 18% in the first half of the year).
Conversely, the demand indicators are still lacklustre. Indeed, Germany is the only major country in the Eurozone where household confidence has not improved in recent months, according to the GFK index (-21.2 in October, compared with -21 in June). At the same time, the new factory orders indicator has halted its three-month decline, marking a stabilisation at a low level rather than a rebound.
Inflationary pressures are still high in the services sector (3.8% y/y in September), which explains why harmonised core inflation (3.0% y/y in September) is still above the Eurozone average (2.7%), unlike in the other three major Eurozone countries (France, Italy and Spain). The continuing deterioration in the IFO's employment climate (94 in September, the lowest since 2005, when the Hartz reforms were adopted) is another factor adversely affecting household confidence.
As a result, the expected rebound in German growth in Q4 (our forecast is 0.3% q/q) is still possible (notably due to the reduced production constraints in the automotive sector), but it is shrouded in uncertainties that point to a downside risk.
Article completed on 29 October 2024
