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

After experiencing somewhat more subdued expansion in the winter half-year 2009/2010, the German economy appears to have enjoyed solid growth in spring 2010. In the second quarter of 2010, gross domestic product is expected to have grown at a faster rate than in the first quarter, when the national economy grew by 0.2% in price- and seasonally-adjusted terms [2]. The current growth is the result of a sharp expansion in industrial output on the one hand, and pent-up demand following weather-related obstacles to production during the winter - which is now stimulating the construction sector in particular - on the other. German industry is benefiting from external economic stimuli as well as a rebound in domestic investment activity. Thanks to sustained, brisk domestic and foreign demand for industrial goods, industrial output is likely to continue its positive development in the coming months.

The economic recovery is also having an increasingly positive impact on the labour market. The improved condition of the labour market will increasingly help to ensure that consumer spending also grows over the course of the year. Overall, Germany's economic recovery has become increasingly broad-based and solid. However, a number of risks remain. The recovery is not yet self-sustaining in certain key industrialised countries, while some emerging economies are already showing signs of overheating. The debt crisis in the Eurozone is also a source of uncertainty. Finally, in recent months, various national and international leading indicators have continued to develop in a positive direction but with greater restraint, while other indicators have actually slowed, reflecting the increasing focus on existing risks.

Thanks to a marked improvement in the amount of incoming orders, the goods-producing industry continued its solid recovery in May as output increased by 2.6% over the previous month. Overall, industrial output rose sharply by 3.4%, primarily due to the brisk pace of investment and the continuing solid expansion of external economic activity. In contrast, construction output underwent a correction following the unusually strong spring pick-up (-2.3%).

Compared to a year ago, production continued to rise markedly, particularly in industry (+13.7%) but also in construction (+3.8%, both figures adjusted for working day variations). The trend in ordering activity remains brisk in both industry as well as construction. While industrial demand weakened slightly in May (-0.5%), it continues to trend steadily upward, with strong stimuli coming from both the domestic and foreign fronts. While experience shows that ordering activity in the construction sector is subject to volatile swings, the trend here continues to point upward as well. In the current year, it is primarily the government stimulus programmes that are providing a sustained stimulus to the construction sector. Residential construction will also see a moderate expansion due to an increase in the number of building permits.

Consumer spending is expected to have remained rather restrained in the second quarter. While retail sales (excluding motor vehicles) increased solidly by 3.0% in May, they remained basically unchanged in the three-month comparison. Furthermore, new passenger vehicle registrations still show no noticeable turn for the better since the expiration of the car scrappage scheme. However, consumer spending is expected to revive in the coming months due to continuing favourable developments on the labour market as well as the rise in disposable income resulting from various relief measures for private households that went into effect in early 2010. Price trends - which continue to remain calm - will also likely have a supportive impact here.

In the most recent reporting period, foreign trade once again enjoyed strong growth. Exports rose by 9.2% in May in current prices, while imports increased at an even faster pace (+14.8%). This increase in exports more than compensated for the decline in the previous month. As a result, exports continue to trend sharply upward. Given the dynamism that is resulting from the ongoing recovery of the global economy, exports will continue to see tangible growth in the coming months as well. In the longer term, however, the current dynamism in export activity is likely to weaken somewhat. Among other things, this is being signalled by the export expectations of companies, which declined slightly in the most recent reporting period from the high level reached in June. The sharp rise in imports is not only export-induced but is also a visible indication of the domestic economy's recovery.

The economic rebound is also being reflected in increasingly positive developments on the labour market. Labour market figures continue to feel the beneficial effects of the spring pick-up. The employment growth of recent months continued in May, as total employment increased by 38,000 in seasonally adjusted terms. A particularly encouraging development is the ongoing increase in jobs requiring social insurance contributions, which rose by 62,000 in April (seasonally adjusted). Unemployment again declined substantially in June by 21,000 (seasonally adjusted). In June, there were a total of 3.153 million registered unemployed persons, up 257,000 from a year ago. The number of vacant positions continues to increase, and leading indicators also point to a sustained - albeit weaker - expansion in employment.

Price trends in Germany continue to remain calm overall. To be sure, certain upstream prices - particularly import prices - saw solid increases due to ongoing rises in the prices of industrial raw materials and energy. However, because consumer spending remains restrained, the pressure on upstream prices is having only a very limited impact on consumer prices. In June, consumer prices increased by 0.9% over the previous year after seeing a year-on-year rise of 1.2% in May. The core inflation rate stood at 0.7% in June.

Note: A detailed report and commentary on the overall situation and trends in the German economy will be published in the August 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 in the middle of the 29^th week of 2010.

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[1] This report is based on statistical data that were available as of 16 July 2010.
[2] Unless otherwise indicated, comparisons with preceding periods are based on figures adjusted for price, calendar and seasonal variations.