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

© iStock.com/blackred

  • Germany’s economy continues to display a mixed picture. Economic growth in the services sector and particularly the construction industry remains positive. Due to the slowing global economy, industry is experiencing a period of economic weakness. However, important domestic upward forces remain strong.
  • Industrial production fell slightly in February. New orders in the manufacturing sector, however, experienced a sharp decline. In contrast, the construction industry continues to report significant growth in production.
  • Bolstered by fiscal policy, incomes are rising sharply and ensuring brisk consumer demand from private households.
  • The number of people in work is continuing to rise and unemployment is falling. The dynamic growth in employment is also likely to weaken somewhat due to increasing shortages of skilled workers.

Germany’s economy continues to show a mixed picture. While the services and building industries – which are more domestically based – are seeing a high level of growth, the manufacturing industry – which is globally based – continues to experience a phase of economic weakness. The end of special factors (WLTP approval procedure and low water levels of the Rhine river) has had a positive impact on production. However, production output remains considerably lower than in the first semester of 2018. At the same time, the trend in new orders and current business expectations suggest a continuation of the period of economic weakness in the manufacturing sector. In the first quarter, however, this will probably be more than offset by the other economic sectors, which account for more than three quarters of gross value added. Significant domestic upward forces remain strong. Employment and income levels are rising and are leading to an increase in consumer spending. In addition to this, expansive fiscal measures are being undertaken which benefit not only private consumer spending, but also public spending and investments. If we take a somewhat broader view, the course is thus set for a recovery. The global economy will gradually overcome its current weakness and will again offer favourable sales prospects, both abroad and for our domestic industry. [1] However, there remains a significant risk of knock-on effects for the German economy, especially due to the trade conflicts and the unresolved Brexit.

The global economy is recording slow growth at present. Both global industrial output and world trade even saw a decline at the end of last year. This trend continued in January 2019 for industrial production; world trade remained below the previous year’s level despite experiencing a slight recovery. In March 2019, the IHS Markit PMI indicator of sentiment for global industry remained 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 accumulation of global risks, the international organisations are working on the assumption that the development in the global economy will be weaker, but still positive.

The current lack of impetus from the global economic environment is also reflected in German export figures. For example, exports of goods and services dropped in February by 1.9% in seasonally adjusted terms and in current prices. The two-month comparison shows weak growth of 0.3%. At present, however, the companies are not expecting a clear acceleration. Following a significant downturn in March, ifo export expectations reflect the lowest expectations since autumn 2012. Overall, the indicators are suggestive of a restrained development in exports in the coming months. For example, nominal imports of goods and services dropped in February by 1.6% in seasonally adjusted terms and in current prices. The two-month comparison shows a slightly smaller rise of 0.2%.

In February, output in the goods-producing industry increased by 0.7%. However, industrial activity remained subdued. Industrial output decreased slightly, down 0.2%, and was thus 0.6% below the level of the fourth quarter of 2018. By contrast, the construction industry recorded strong growth of 6.8% in February. In the two-month comparison between January and February and November and December, industrial output almost stagnated (-0.1%), while the automotive sector reported a decline of 1.0%. The construction industry, however, increased its production significantly, up 4.4%. The outlook for industry remains very subdued. New orders in the manufacturing sector fell by 4.2% in February, which was a sharp decline compared with January. Foreign orders even fell by 6.0%. The more meaningful two-month comparison shows a drop of 3.7% in new manufacturing orders. It furthermore shows that orders from the non-euro zone developed most unfavourably (-7.0%). The mood in the manufacturing sector also continued to worsen in March. In view of declining foreign demand and high international risks, industrial activity is therefore likely to remain subdued for the time being. This notwithstanding, construction activity continues to show a very dynamic trend.

In the fourth quarter, consumer spending rose by 0.2% over the previous quarter, meaning that it recovered slightly from the fall seen in the third quarter. Consumer spending is likely to pick up again in the current quarter. In February, retail turnover (excluding vehicles) rose by 0.9%, following an increase of 2.8% in January. In February 2019, the positive development in new registrations of passenger cars by private owners also continued (+3.5%), trending towards normal growth.

The positive development on the labour market is continuing despite the economic slowdown. However, there are signs of a slower pace in the expansion of employment. The rise in employment in February continued at the average rate seen over the past 12 months, with 39,000 more people in work. As is usual for the time of year, the unadjusted figures went up slightly, increasing to 44.8 million. With an increase of 61,000, employment subject to social insurance contributions rose in January as strongly as in the previous month. In March, the seasonally adjusted number of unemployed persons dropped by 7,000 after a sharp decline in February. According to the unadjusted figures, unemployment fell to 2.3 million people and the unemployment rate contracted to 5.1%. Long-term unemployment is clearly trending downwards; the year-on-year level was down by nearly 12%. The economic potential of structurally weak regions continues to pose a challenge.

----------------------------

Note:
A detailed report and commentary on the overall situation and trends in the German economy will be published in the May 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 17th calendar week of 2019.

----------------------------

[1] The report is based on statistical data that were available as of 12 April 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.