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

© iStock.com/blackred

  • The German economy’s performance slowed slightly in the second quarter.
    The global economic environment including trade conflicts, Brexit and geopolitical crises is having a negative effect on international trade and the global economic development. This is affecting German industry. However, the domestic economy remains robust.
  • Output in the goods-producing sector declined in June. The quarterly comparison shows that all sectors have experienced losses. It shows that new orders in the manufacturing sector fell slightly again in spite of the increase seen in June.
  • The rising incomes of private households and fiscal policy stimuli continue to provide a boost to the economy.
  • The weaker economy is gradually affecting the labour market. The increase in employment is continuing at a slower pace while unemployment is stagnating at a low level.

Germany’s export-oriented economy keeps operating in a difficult external economic environment.
Germany’s gross domestic product (GDP) saw a slight drop of 0.1% in the second quarter (in price-adjusted terms). [1,2] Following the solid growth in the first quarter, the German economy delivered the second-highest economic output in the history of the Federal Republic of Germany. While foreign trade made a negative contribution to growth due to a decline in exports, domestic demand remained strong. The ailing global economy continues to affect the manufacturing industry, in particular.

While the service economy, which is largely oriented to the domestic market, continued to increase its value added, industry-related services experienced the first signs of an economic slowdown. In addition, there was only weak improvement in the spring in the construction sector after the mild winter quarter. Domestic energy generation dropped due to cheaper energy imports.

The economic outlook currently remains subdued. The ongoing trade conflicts have worsened recently and thus, the prospects for an orderly Brexit have not improved. Against this background, cyclical indicators have weakened. Sales figures and new orders in industry are noticeably lower than one year ago and the business climate has deteriorated significantly. However, the domestic economy continues to be intact. Employment and wages are rising, whilst the monetary and fiscal policy is providing positive stimuli.

The overall global economy remains fragile and subdued. While both global industrial output and world trade increased slightly in May, growth rates continued to be low compared to the previous year. In July, the global business climate in industry continued on a downward trend that had started at the beginning of 2018. In the same period, the IHS Markit PMI indicator fell even further below its growth threshold. The cool ifo global economic climate has continued to worsen in the third quarter of 2019 due to the accumulation of global risks. Against this backdrop, the international organisations are working on the assumption that the development in the global economy will be rather weak, but still positive.

The slump in world trade is also reflected in the figures on German exports. Exports of goods and services dropped in June by 1.5% in seasonally adjusted terms and in current prices. Taking the second quarter of 2019 as a whole, there was a sharp decline of 1.8%. According to the ifo export expectations, which fell to the lowest level recorded since the financial crisis, companies are still not expecting further growth in exports in the coming months. Imports of goods and services dropped in June by 0.1% in seasonally adjusted terms and in current prices. They slowed by 0.9 % from the level registered for the previous quarter. In price-adjusted terms, exports also fell more strongly than imports in the third quarter, thus contributing negatively to growth in foreign trade.

After taking a breather in May, output in the goods-producing industry continued to decline in June, falling by 1.5%. Thus, the fall in orders in the second quarter totalled 1.8% compared to the preceding quarter. In this context, there was also a decline in output in both the construction sector (-1.1%) and industry (-1.7%). Within industry, mechanical engineering, metal production and car manufacturing suffered the biggest declines in the second quarter. As far as the construction sector is concerned, the economic trend is less likely to be the reason for the weak recovery in the spring but rather the sector’s high level of output in the winter quarter. The increase in net imports contributed to the decline in power generation. The current indicators of new orders and of sentiment suggest that industry will not provide positive stimuli in the coming months. Large orders rose by 2.5% in June. When viewed in quarterly terms, however, there was a further decline.
At -1.0%, the decline was noticeably lower, though, than the figure for the first quarter (-4.2%). However, the business climate in the manufacturing sector deteriorated further in July.

Consumer spending is therefore an even more important pillar of the German economy. However, it is likely to have grown somewhat less dynamically in the second quarter compared to the first quarter in which consumption was high. However, retail turnover (excluding vehicles) grew merely by 0.1% in the second quarter despite rising sharply in June. New registrations of passenger cars by private owner groups saw more modest growth in the second quarter following the release of pent-up demand in the first quarter. On balance, the business climate in the retail sector is positive and still significantly better than in the long-term average. However, it has continued to deteriorate since the autumn of last year.

In June, growth in jobs continued at a slower pace. The rise in gainfully employed people only amounted to 8,000 (adjusted for seasonal factors). A lower increase in gainful employment was last seen three years ago. Compared to the previous year, however, this number still represents an increase of 410,000 persons in unadjusted figures. The increase in jobs requiring social insurance also slowed considerably in May and stood at 20,000 in seasonally adjusted terms. The economic slowdown can particularly be seen in the fact that the number of people working in the temporary employment sector dropped by 12,000 in May compared to the previous month. Unemployment nearly stagnated at a low level in July (+1,000 persons) in seasonally adjusted terms, whereas in unadjusted figures it increased by 59,000 persons to just under 2.3 million at the beginning of the summer holidays. On balance, there has also been little change in the area of underemployment. The leading indicators suggest that the moderate increase in employment will continue while unemployment will rise slightly.
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Please note:
A detailed report and commentary on the overall situation and trends in the German economy will be published in the September 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 36th calendar week of 2019.
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[1] Preliminary data on GDP development in the second quarter of 2019 issued by the Federal Statistical Office.
[2] The report is based on data that were available as of 14 August 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.