The Economic Situation in the Federal Republic of Germany in January 2010 [1]

The overall economic development in Germany has pointed upwards since spring 2009. Due to the slump in the last winter half-year, however, initial figures show that average economic growth for the whole of last year decreased by 5% in real terms. In contrast, employment remained virtually stable. Boosted by further stimuli from the state, by a continuation of the highly expansionary monetary policy, and by the general improvement in the world economy, the economic recovery will continue and strengthen this year. However, the process of recovery seems to have paused in the last quarter of 2009. Furthermore, the weather is affecting it at the start of the new year. Not least, the fact that the car scrappage scheme ended in September is having a dampening effect both on domestic demand and on industrial output.

In the goods-producing sector, the underlying recovery is continuing, albeit at a slower pace and in the face of declining stimuli from car scrappage schemes in Germany and elsewhere. As a result, the recovery in overall production in the goods-producing sector of 0.7% (adjusted for price and seasonal factors [2]) in November did not fully offset the previous month's decline. In the two-month comparison, output scarcely changed (+0.1%), but the three-month comparison remained clearly positive (+2.9%). The November gains derived both from industry (+0.9%) and the construction industry proper (+0.7%). Going by trends in turnover, the main driving force at present is foreign demand, which grew by 4.9% over the previous period in the three-month comparison after adjustment for price and seasonal factors. Sales growth in Germany was smaller in the same period, at +1.0%. At nearly -18% (seasonally adjusted), November's industrial output still lagged a long way behind its peak in Q1 2008. Price and seasonally adjusted results for new orders in industry showed a slight rise (+0.2 %) in November, following October's sharp fall. The underlying demand trend continued to point upwards, but it was substantially less dynamic (two/three-month comparisons respectively -1.2% and +2.6%). Following some strong growth, the latest figures show foreign demand now actually shrinking in two consecutive months. The developments in the motor vehicle sector and related industries had a dampening effect on orders in general. But the continued improvement in the ifo Business Climate highlights the continuing positive underlying mood in trade and industry.

Construction output improved in November by 0.7% after adjustment for price and seasonal factors, but the trend is weakening slightly (three-month comparison: -0.7%). It exceeded the previous year's level by 3.0 % in the three-month comparison. Demand in the construction industry proper has improved on balance since the low-point in Q1 2009, and the latest figures show a 3.6% expansion (after adjustment for price and seasonal factors) for October. The outlook for the construction industry proper remains cautiously positive. The public-sector infrastructure measures and the upswing in house-building suggest that there will be certain stimuli in the coming months, despite the fact that these are probably being temporarily outweighed by the influence of the weather.

The latest figures show that consumer spending was restrained. Whilst it boosted the economy in the first half of 2009, the decline in demand in Q3 by 0.9% after adjustment for price and seasonal factors continued into Q4. Retail sales (excluding the motor vehicle trade) shrank by 1.7% in November (seasonally adjusted), following +0.9% in October. In view of the end of the scrappage scheme, sales of vehicles also declined further, as expected. The future outlook is mixed. On the one hand, the situation on the labour market is extremely tense; on the other, consumer spending is being given a further stimulus by the new tax cuts. The retail sector itself is now less pessimistic about the future.

Latest figures show that the expansionary trend of German merchandise exports has slowed somewhat. In November, they grew by 1.6% (after seasonal adjustment), and in the more meaningful three-month comparison they rose by 4.1%. Base effects in particular are causing the year-on-year gap to diminish - in November, it was down to just -3.1% - but the differences between the current levels and pre-crisis figures remain substantial. Nominal goods imports shrank sharply in November, at -5.9%, and are an indication of weak domestic demand in Q4. Nevertheless, the foreign demand for industrial goods, which has weakened but is still trending upwards, and the continuing improvements in export expectations on the part of the companies in view of a recovering global economic environment, are indicative of a positive external economic outlook.

The labour market remained most robust through the end of 2009. In the light of the cyclical environment, the unemployment trend has remained unusually favourable. November saw a moderate decline in employment, at -18,000 people (resident concept). The unadjusted figures put total employment at 40.58 million, down 218,000 from a year ago. The reduction in employment is being substantially alleviated by the use of working time flexibility. And registered unemployment actually fell slightly in recent months, with the most recent figures showing a decline of 3,000 in December (seasonally adjusted). However, special effects have played a role here. Compared to a year ago, the number of unemployed persons rose by 173,000 to 3.276 million. The unemployment rate rose slightly to 7.8 %. Despite the fact that the mitigating effects of short-time work are diminishing, the leading indicators are not suggestive of an increased rate of job-shedding. The retention of employment has also hit productivity, and has thus resulted in higher unit wage costs. In view of this, the continuing severe underutilisation of capacities indicates the risk of a further deterioration on the labour market.

Price trends continue to remain extremely calm, especially at the consumer level. Consumer prices in December were 0.9 % above the previous year's level. This was affected by the fact that energy prices actually exceeded the pre-year level again for the first time (+1.0%). The core inflation rate (excluding energy and seasonal foods) also stayed at its low level of +1.0%. In comparison with the preceding month, the rise in consumer prices in December was slightly stronger due to seasonal factors, at 0.8%, but after seasonal adjustment the rise was only 0.1%.

Note:
A detailed report and commentary on the overall situation and trends in the German economy will be published in the February edition of the monthly report, Schlaglichter der Wirtschaftspolitik ("Economic policy highlights", in German only). This report will be available on the website of the Federal Ministry of Economics and Technology at the end of the 3rd week of 2010.

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[1] This report is based on statistical data that were available as of 15 January 2010.
[2] Where not otherwise specified, the seasonally adjusted data have been calculated in accordance with the Census X-12-ARIMA procedure.