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

© iStock.com/blackred

  • Germany’s economy made a modest start to 2019. The economic development in Germany has entered more troubled waters due to increased risks and unknowns in the external economic environment.
  • The leading cyclical indicators remain restrained. However, solid domestic forces for growth and a fiscal boost are providing a stimulus at the beginning of the year.
  • Capacity utilisation remains above-average in the construction industry. The industrial sector cut back on production at the beginning of the year, and new orders, not least from abroad, were weak.
  • Bolstered by fiscal policy, incomes are rising sharply, and ensuring brisk consumer demand.
  • The number of people in work is continuing to rise, whilst the rate of fall in unemployment is likely to slow.

Germany’s economy made a modest start to 2019. [1] This is particularly true for the industrial sector, where output shrank clearly in January. The level of new orders and the indicators of sentiment are also worsening in the sector. This suggests that the period of weakness in the industrial sector is likely to continue in the face of sluggish foreign demand. In contrast, further growth is forecast for the other economic sectors, and particularly for most service sectors. This has been emphasised by the ongoing clear rise in employment, particularly in the service sectors. The German economy will remain divided between a weak industrial sector and flourishing service providers. As a consequence, gross domestic product is expected to record a moderate rise at best in the first quarter. The German economy was pretty much flat in the second half of 2018. The growth of domestic demand was modest. Growth was further hit by the negative investments in inventories. Exports recovered to some extent in the fourth quarter, but the concomitant clear rise in imports meant that foreign trade did not generate growth.

The stimuli from the global economy are restrained at present. A slower development was observed at the end of last year both in industrial output and in world trade. Most recent figures from December 2018 actually reflect a decline. In February 2019, the IHS Markit PMI indicator of sentiment for global industry was at its lowest level since June 2016. The ifo index on the global economic climate also reflected a cooler mood in the first quarter of 2019, particularly for the developed economies. In view of the indicators and the current accumulation of global risks, the latest forecasts of the international organisations assume that the development in the global economy will be weaker, but still positive.

This is also reflected in the figures on German exports of goods. For example, exports were flat in January in seasonally adjusted terms and in current prices (+/-0.0%). In the two-month comparison, however, exports increased (+1.5%). After adjustment for prices, this increase is likely to be a little higher. At present, however, the companies are not expecting a clear acceleration. Whilst the ifo export expectations have improved, they still reflect low expectations. Overall, the indicators are suggestive of a restrained development in exports in the coming months. Seasonally adjusted and at current prices, nominal imports of goods rose by 1.5 % in January. The two-month comparison shows a smaller rise of 0.7%. However, given falling import prices, the price-adjusted rise here is likely to be greater.

In January, output in the goods-producing industry dropped. The industrial sector in particular cut back on output (-1.2%) even though the WLTP problem – the backlog in type approvals for cars – has presumably been largely overcome. In contrast, the construction sector recorded a slight expansion (+0.2%). However, the December figures were revised sharply upwards for both the industrial sector and the construction industry. Despite this, the two-month comparison still reveals a slight downturn in industry. New orders in the manufacturing sector also fell sharply, by 2.6% in January; at the same time, the figures for December were revised sharply upwards. Orders in the automotive industry (-6.1%) again softened appreciably following a fourth quarter which made up for the lost growth of the weak third quarter. There was a particularly clear drop in the level of orders from abroad in January, so that the level of new orders was also down in the two-month comparison. The business climate also continued to deteriorate in February. It is true that the cushion of orders is still very large at the turn of the year, but the industrial sector is likely to remain soft in view of weak international demand and high external risks. The boom in the construction industry will continue in view of the clear rise in orders in the final quarter of 2018.

In the fourth quarter, consumer spending rose by 0.2% over the previous quarter, meaning that it recovered from the fall seen in the third quarter.

Consumer spending is likely to pick up again in the current quarter. In January, for example, retail turnover (excluding vehicles) rose strongly, by 3.3%. In February 2019, the positive development in new registrations of passenger cars by private owners continued (+3.5%). This means that registrations of private cars have risen by 56% since the low-point in September directly after the introduction of the WLTP standard.

Positive trends on the labour market are continuing despite the weaker economy. According to the latest figures, the rise in employment in January was, at 79,000 people, much higher than in the preceding months; however, upward revisions for the preceding months can be expected. As is usual for the time of year, the unadjusted figures were down from November, at 44.8 million. The seasonally adjusted number of jobs requiring social insurance contributions increased sharply again in December. The weaker economy is likely to gradually impact on the recruitment efforts made by companies, and to lead to a slower fall in unemployment in the coming months. The number of unemployed decreased by 21,000 in seasonally adjusted terms in February; the unadjusted figures show a drop to just below 2.4 million. The unemployment rate thus remained unchanged at 5.3 %. Long-term unemployment is trending downwards; the year-on-year level was down by nearly 12%. The economic potential of structurally weak regions continues to pose a challenge.

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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 April 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 at the end of the 13th calendar week of 2019.

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[1] The report is based on statistical data that were available as of 14 March 2019. 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.