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

© iStock.com/blackred

  • Industrial activity remains sluggish and there is noticeable headwind coming from foreign demand. Current data are also indicative of a calmer pace in the services sector. This suggests a weak underlying economic trend for the second quarter.
  • Industrial output rose moderately in May, while incoming orders in the manufacturing sector fell considerably. Likewise, the construction industry also recorded a noticeable decline.
  • The rising incomes of private households and fiscal policy stimuli are providing a boost to the economy.
  • The weaker economy is gradually affecting the labour market: growth in jobs is continuing at a slower pace. Unemployment figures stagnated in June.

Following the surprisingly strong growth of the German economy in the first quarter, the current cyclical indicators point to a subdued development in the second quarter.[1] The signals from the service sector suggest that the strong growth at the beginning of the year will slow down somewhat in the second quarter. In addition, industry continues to experience a period of weak growth. While industrial output has recently recovered somewhat at a low level, it has been showing a downward trend since the turn of the year 2017/18. The weak development of new manufacturing orders and the gloomier business climate indicate that the clearly subdued trend in industrial activity is likely to continue. Recently, the construction industry also recorded a sharp decline in output, albeit from a very high level. Even though the labour market is starting to show signs of the economic slowdown, it keeps producing noticeable domestic economic momentum. The number of people in work is continuing to rise, albeit at a slower pace, and income rises are bolstering consumer spending. The government is providing fiscal stimuli, thereby fostering both consumer spending and public spending on consumption and investment. Following restrained growth in the second quarter, the positive forces for growth are likely to prevail again as soon as the global economic environment improves. However, the economy is currently facing considerable downside risks, not least due to trade conflicts, the Brexit process and geopolitical tensions.

Due to the above risks, the global economy is currently experiencing a slow period. In April, both global industrial output and world trade saw a decline. Industrial output has also been declining, both in the developed and in the emerging economies. The IHS Markit PMI indicator of sentiment for global industry saw a further decline in June, falling below its growth threshold. After declining four times in a row, the ifo global economic climate improved slightly in the second quarter of 2019, but remained cool. 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 sluggish signals from the global economic environment reflected recently in German exports. For example, exports of goods and services dropped in May by 0.3% in seasonally adjusted terms and in current prices. The two-month comparison of April/May against February/March showed an even more pronounced decline of 1.8%. With export prices remaining at a constant level, the decline should be about the same in real terms. According to the ifo export expectations, which fell further in June, companies are not expecting further growth in exports in the coming months. Nominal imports of goods and services dropped in May by 1.4% in seasonally adjusted terms and in current prices. The two-month comparison shows a decrease of 0.7%. However, import prices have risen somewhat, so that imports are likely to have declined more sharply in price-adjusted terms. At €106.4 billion, the current account surplus in the first five months of 2019 was €0.6 billion higher than in the same period the year before.

Output in the goods-producing industry expanded slightly in May (+0,3%) after a strong decline in April. The downward trend in recent months reflects the slump in manufacturing orders and the current weakness in the global economy. The manufacturing sector recently showed two opposing developments: the construction sector saw a considerable decline in May whilst industry recorded moderate growth. The two-month comparison of April/May against February/March showed that the industrial sector also experienced a decline in output of 1.2%. Construction saw an even stronger decline of 3.0%. Within industry, the automotive sector grew strongly, up 7.4% which was in contrast to April figures, whilst the mechanical engineering industry saw a slight decline of 0.3%. The current indicators of new orders and of sentiment suggest that activity in manufacturing will remain subdued in the coming months. After stabilising at a low level in March and April, the number of new manufacturing orders fell again significantly in May, dropping by 2.2 % compared with the previous month. This means that they are now about 9% below their monthly average in 2018. The business climate in the manufacturing sector has been showing a noticeable downward trend since the turn of the year 2017/18 and deteriorated slightly once more in June.

In the first quarter of 2019, private consumer spending rose surprisingly strongly, up 1.2% over the preceding quarter. The last time a similarly large increase in growth was recorded was in the third quarter of 2011. Recent indicators suggest that this strong level of growth will not continue in the second quarter: retail turnover (excluding vehicles) fell by 0.6% in May compared with the previous month. New registrations of privately owned passenger cars recovered somewhat again in June (+1.3%). The second quarter of 2019 as a whole, however, saw a significant decline in new registrations of 2.1%.

Growth in jobs continued in May at a considerably slower pace. The rise in gainfully employed people recently amounted to 21,000 (adjusted for seasonal factors), compared with a monthly average of 45,000 in the first quarter. According to the unadjusted figures, 45.3 million people were gainfully employed in May. Employment subject to social security contributions also rose more slowly in April compared to the average for recent months. The number of unemployed stagnated in June in seasonally adjusted terms; the unadjusted figures show a drop by 20,000 to 2.2 million. After a strong correction made in May, there were probably no more special effects this month as a result of the more precise recording of the number of affected persons. However, underemployment rose in June for the third time in a row (+6,000 after adjustment for seasonal effects), which suggests that the cyclical slowdown is gradually affecting the labour market. The leading indicators suggest a continuation of this trend on the labour market over the coming months. 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 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 at the end of the 31st calendar week of 2019.

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