The German economy is still on the upswing. According to its autumn projection, the Federal Government expects overall economic output to expand by 1.8% both this year and next year. Here, against the backdrop of a more challenging external economic environment, the solid underlying cyclical dynamism is primarily driven by the sound domestic economy. However, this is overshadowed by temporary adjustments in production by car-makers and their component suppliers. This is a consequence of the switch to the new WLTP emissions test cycle, which has been binding since 1 September and has triggered a backlog of type approvals for cars. As a consequence, the rise in overall economic output is somewhat lower in the third quarter. As the backlog is gradually tackled, the economy is likely to pick up speed in the fourth quarter. All of the latest indicators for the industrial sector and the overall economy suggest that the expansion of the German economy is rooted in solid foundations. Significant domestic upward forces are continuing to have an impact: employment and incomes are increasing strongly. Value creation is growing, particularly in the services sector, and the construction industry is booming. In the coming year, the implementation of the coalition agreements is likely to unleash a powerful stimulus.
The stimulus from the global economic environment is smaller at present. This is demonstrated by indicators for global trade and global industrial production. The emerging economies are experiencing varying developments, and the rather slower expansion of industrial output is mainly caused by the developed economies. On the other hand, the weakness of world trade is currently due to smaller flows of trade between the emerging economies, particularly in Asia. The IHS Markit Global Composite PMI dropped in September for the third month in succession, and the ifo index on the global economic climate deteriorated for the third quarter of 2018. Against this backdrop, the latest forecasts by international organisations continue to assume that the development in the global economy will be positive, but weaker than expected in previous forecasts.
In principle, German exports of goods and services are suffering from the more challenging external economic environment. In August, exports fell slightly, by 0.6% in seasonally adjusted terms and in current prices. In the more stable three-month comparison, exports rose clearly, by 1.0% in nominal terms, but this figure is likely to be somewhat lower after adjustment for inflation. ifo export expectations remain low, as companies await further developments, and do not yet point to a clear pick-up in exports. Nominal imports of goods and services rose between March and July. They dropped by 1.8% in August in seasonally adjusted terms. In the three-month comparison, the growth of imports amounted to 3.6%. The development was probably also clearly positive after adjustment for prices.
In the goods-producing industry, the fall in production seen in the two preceding months slowed significantly in August, although the afore-mentioned special factors pertaining in the automotive sector continued to impact. Nevertheless, industrial output dropped by only 0.1% in August, but it fell by 2.2% in the two-month comparison of July/August against May/June. Construction output fell by 0.7% in the same period. Despite this, new orders in the manufacturing sector followed set-backs in the two preceding months with a 2.0% rise in August, with sharp rises in the automotive sector. However, in the two-month comparison, orders were still clearly softer, at -1.9%. A role here was probably played by the ongoing slowdown in world trade and increased uncertainties due to the trade disputes. Nevertheless, the industrial sector is likely to see a recovery as the backlog in type approvals is gradually tackled. The rise in business expectations to the highest level since February reflects confidence. The very good situation on the order books, with orders covering 5.6 months, provides security. The construction sector is working at nearly full capacity, and its boom is set to continue.
The good development of the labour market and sharp wage rises are ensuring that consumer spending will continue to be an important pillar of the German economy. In its autumn projection, the Federal Government forecasts that consumer spending will expand by 1.6% this year and a further 2.0% next year. The latest figures for retail sales suggest a slight softening: following a weak start to the third quarter, they saw a further marginal drop of -0.1% in August. Automotive sales also fell in July. The problems with the type approvals also led to a sharp drop in new registrations of passenger cars in September (-32.8% against August). In addition to the rise in incomes, the indicators of sentiment also suggest that consumer spending will develop positively in the coming months. Both the ifo retail business climate and consumer sentiment improved in September.
The positive development on the labour market is continuing. In August, seasonally adjusted employment increased by 31,000 persons; annualised employment growth was 1.3%. In July, the rise in jobs subject to social security contributions was higher than that seen in the preceding months, at 77,000 people. Even if the leading indicators in September pointed in different directions, they do signal ongoing strong demand from companies for labour. In September, the seasonally adjusted number of unemployed persons dropped by 23,000; according to the unadjusted figures, they fell to 2.26 million following the end of the summer holidays. Tackling long-term unemployment and boosting the economic potential of structurally weak regions remain long-term challenges.
