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

© iStock.com/blackred

  • Despite weak global trade and external economic uncertainties, the German economy is proving solid. The upturn is mainly being driven at present by the domestic upward forces.
  • Output in the goods-producing sector is slow at the beginning of the third quarter, with special factors playing a role. New orders in the manufacturing sector are also down, but the level of orders on the books remains very high. The construction industry is booming.
  • Employment, incomes and consumer demand are continuing to trend upwards. Retail sentiment is also good.
  • The number of people in work is continuing to rise and unemployment is falling. However, structural challenges exist, such as a reduction in long-term unemployment and the response to structural change.

The German economy is experiencing a solid expansion, despite protectionist tendencies in the global economy. In the first half of 2018, price-adjusted GDP rose by 0.9% over the preceding period. Prior to this, GDP had expanded by 1.6% in the first half of 2017 and by 1.1% in the second half of the year. On the expenditure side, the sole stimulus in the first half-year came from the domestic economy, and particularly from consumer spending and gross investment. The upswing will continue in the second half of the year despite the uncertainties in the external economic environment. However, the signals from the cyclical indicators are currently mixed. In industry, a much brighter business climate contrasts with falling industrial orders and hesitant production. However, this is partly due to special factors and is not solely a result of the current weakness of world trade. Industry is therefore likely to move beyond its current soft period during the rest of the year. 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.

The stimulus from the global economic environment is smaller at present. This is demonstrated by indicators for global trade and 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 August for the second month in succession, and the ifo index on the global economic climate again deteriorated for the third quarter of 2018. For this reason, the latest forecasts by national and international organisations assume that the development in the global economy will be weaker, but positive.

In principle, German exports of goods and services are suffering from the difficult external economic environment. In July, exports fell slightly, by 0.6% in seasonally adjusted terms and in current prices. This drop is likely to be somewhat greater in real terms due to the rise in export prices in the same period. In the more stable three-month comparison, exports rose clearly, by 1.7% in nominal terms, but this growth is also 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. In contrast, nominal imports of goods and services have been rising since March. They expanded by 2.9% in July in seasonally adjusted terms. In the three-month comparison, the growth of imports was an impressive 3.8%. Since import prices rose by less during the same period, imports probably also recorded a very positive development in real terms.

In the goods-producing sector, the development is restrained, but special factors played a role here. Industrial output rose by 1.9% in July, but it dropped by 0.6% in the two-month comparison of June/July against April/May. Construction output grew by 0.7% in the two-month comparison. New orders in the manufacturing sector followed up on a sharp drop of 3.9% in June with another fall of 0.9% in July. In the two-month comparison, this meant a clear 3.1% fall in orders. Whilst domestic ordering activity increased by 0.7%, orders from the eurozone softened by 2.0%, and there was a sharp 8.0% fall in orders from the non-eurozone. In addition to the uncertainty caused by the trade conflicts, this is likely to be also related to the backlog of type approvals of cars under the new WLTP driving cycle. The manufacturing industry in Germany still has very good order reserves; as of June, the range was again 5.6 months. According to the latest ifo Business Climate Survey, the business climate in the manufacturing sector has improved again, and is well above the long-term average. This means that, once the backlog of approvals for vehicles has been overcome, the industrial sector is likely to continue its expansion. The indicators for the construction sector suggest that the boom there is continuing.

Recent months saw a decent level of growth in wages and incomes. Disposable income was 4.9% higher in the second quarter in year-on-year terms. The continuing good development in employment, coupled with stable prices, means that consumer spending continued to bolster the economy in the second quarter, even if its expansion was not as strong as in the first quarter. Other indicators of consumer spending are also largely positive. Retail sales made a weak start to the third quarter, at -0.4%, following a 0.9% rise in the second quarter. According to the ifo Business Climate Index, retail sentiment was stable and optimistic in August. Consumer sentiment softened slightly, but remained at a high level.

The labour market is continuing to develop favourably. In July, seasonally adjusted employment increased by 46,000 persons; annualised employment growth was 1.3%. In June, the rise in jobs subject to social security contributions was a little higher than the average rise seen in the preceding five months, at 55,000 people. The leading indicators are pointing to ongoing strong demand from companies for labour, and a further moderate rise in employment. The seasonally adjusted number of unemployed fell slightly in August, by 8,000 persons, and in unadjusted terms rose to 2.35 million due to the summer holidays. The gradual reduction in unemployment should continue. Tackling long-term unemployment and boosting the economic potential of structurally weak regions remain long-term challenges.

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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 October 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 39th calendar week of 2018.