Growth curve with pen symbolizes the economic situation; source: iStock.com/blackred

© iStock.com/blackred

  • German economy picked up speed in May. The upswing is continuing at a slightly faster pace. However, external economic risks and economic uncertainty remain high.
  • In May, the goods-producing sector expanded its production significantly. Industrial new orders are improving, but the all-clear has not yet been sounded. The construction industry is booming.
  • Income levels are rising and consumer spending from private households is staying at a high level. The retail sector remains optimistic.
  • The high demand for labour in many sectors of the economy means that the employment rate is continuously rising. It remains necessary to tackle long-term unemployment and higher joblessness in structurally weak regions.

The German economy accelerated in May. [1] Until then, economic output increased comparatively moderately in the current year. Gross domestic product increased by only 0.3 % in the first quarter due to low momentum from important German sales markets and due to temporary national special effects. In April, industrial production was not yet able to gain ground either. It was not until May that the expected upturn took place. It is possible that the economy needed this time to assess the new tone in foreign and trade policy and overcome its initial wait-and-see reaction. Despite these disruptions, the German economy remains in good shape. The construction industry is doing extremely well and labour is still being sought and hired in the service sector. All in all, the current economic indicators suggest that German economic output is now growing somewhat more strongly than in the previous quarter. With the exception of dangers created by international trade policy, prospects are therefore quite positive. This mixed situation also reflects the continuing positive ifo business climate for the economy in general, where grounded expectations continue to contrast with excellent assessments of the economic situation as a whole.

In the first quarter, the upswing in the global economy temporarily lost momentum. This is demonstrated by indicators for global trade and industrial production. With differing developments in the emerging markets, the slowdown in the global economy is mainly due to lower growth in the developed economies. While the IHS Markit Global Composite PMI has been rising again since April, the ifo index on the global economic climate deteriorated for the second quarter of 2018. In May, the OECD Composite Leading Indicator for the OECD countries, which is intended to indicate economic turning points, continued its downward trend that began at the end of last year. While it signals lower economic momentum for the euro zone, including Germany, there are signs of a strengthening in the US. According to its latest projection, the OECD expects global GDP to increase by 3.8% in 2018 and by 3.9% in 2019.

At the beginning of the year, German exports of goods and services suffered from a less dynamic external economic environment. However, they increased again in April and May. Seasonally adjusted and at current prices, they rose by 1.4 % in May after 0.8 % in April. Export prices, however, rose too. In June, the ifo export expectations in the manufacturing sector fell for the seventh consecutive month in light of the current tariff debate. Nominal imports of goods and services increased less strongly in May - seasonally adjusted by 0.8 %. However, in view of rising domestic demand, they are likely to expand in the course of the year.

After volatile and weak industrial production in recent months, there was a strong increase in production in May. Industrial output expanded by 2.7%. However, this is partly due to the distribution of public holidays. Industrial output also increased by 0.5 % in a two-month comparison between February/March and April/May. In May, once again, construction output increased significantly by +3.1 %. In terms of new orders in the manufacturing sector, the downward trend that had lasted for four months was interrupted in May by a strong increase of 2.6 %. The share of large orders was even below average. In a two-month comparison between February/March and April/May, orders fell by 0.8 %. While the number of orders from the non-euro zone rose by 3.6%, domestic orders and orders from the euro zone fell by 1.5% and 6.0% respectively. The manufacturing industry in Germany still has a very good order backlog; as of April, the range was 5.6 months. According to the ifo Business Climate Survey, the business climate in the manufacturing sector has somewhat deteriorated, but is still above the long-term average. The trend in industrial activity should therefore remain moderately upward in the coming months. Risks still exist, however, in particular due to a possible escalation of trade conflicts.

After a short lean economic period in the first quarter of 2018, private consumer spending expanded more strongly again, growing by 0.4 %. Net wages and salaries rose by 1.7% on a seasonally adjusted basis, which represents the strongest increase in three years. Wage growth is also continuing at the current level. In June collective wages exceeded the levels of the previous year by 2.4%. There is a continuing positive trend in employment, and private consumer spending is likely to remain an economic driver in the second quarter. The indicators for private consumer spending, however, provide a mixed picture. Retail sales fell by 2.1 % in May, but the number of new vehicle registrations, especially among private owner groups, is significantly higher than a year ago. While the ifo business climate for the retail sector deteriorated slightly in June, consumer sentiment stabilised at a high level in July.

The positive development on the labour market is continuing. The leading indicators are continuing to point to strong demand from companies for labour. In May, seasonally adjusted employment increased by 37,000 persons; the pace of employment growth was at +1.3% for the year as a whole. As expected, after the dampening special effects of March, the number of employees liable to social insurance contributions increased more strongly again in April (+60,000 persons). The seasonally adjusted number of unemployed fell by 15,000 persons in June, by slightly more than in the two preceding months, and was close to the 2.3 million mark (unadjusted figures). The gradual reduction in unemployment should continue. It remains necessary to tackle long-term unemployment and higher joblessness in structurally weak regions.

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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 is expected to be available on the website of the Federal Ministry for Economic Affairs and Energy in the course of the 31st week of 2018.

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[1] The report is based on statistical data that were available as of 12 July 2018. Unless stated otherwise, these are rates of change against the respective preceding period on the basis of price-adjusted figures which have also been adjusted for calendar-day and seasonal variations.