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

© iStock.com/blackred

  • Following the relaxation of the measures to protect against infection in Germany and abroad, the German economy has begun a tangible recovery. However, the process of recovery is only just beginning. Capacity utilisation is still low.
  • Industrial production has bottomed out. The rise in new orders points to industrial activity picking up in the coming months. Risks do exist, however, particularly as the increase in demand from the non-eurozone is only very slight.
  • The pandemic-related problems on the labour market are also declining. The rise in unemployment in June, at +69,000 people compared with May, was much weaker than that seen in the preceding months. According to initial estimates by the Federal Employment Agency, around 6 million people were on short-time work in May, down from 6.8 million in April. The leading indicators have recovered to some extent following the collapse in the preceding months.

General situation: Economic recovery began in may

Economic activity has bottomed out. After an unprecedented slump in April, things improved in May. The cyclical indicators published over the last month are sending out two signals: the German economy is experiencing a tangible recovery, but capacity utilisation remains very low. [1] The relaxations of measures to protect against infections in Germany and abroad are permitting demand and supply to rise. The industrial sector reported an increase in output of +10.3% between April and May. There was a particularly sharp rise in the production index for vehicles and vehicle parts. According to the German Association of the Automotive Industry (VDA), June saw further increases; both new registrations (+18%) and production (+84%) were up from the May figures. Going forward, further improvements seem likely; the ifo and PMI indexes, as well as the level of new orders, are all pointing upwards. The recovery also embraced parts of the services sector. This is shown e.g. by the development in the retail trade (excluding vehicles), for which the May sales figures are now available: rising by 13.9%, the contrast to April was very pronounced. In the second half of the year, additional incentives to purchase are created by the temporary cut in value-added tax. Despite the macroeconomic recovery, the Federal Statistical Office is likely to report a clearly negative rate of change in gross domestic product on 30 July for the second quarter as a whole. This will primarily be due to the unprecedented slump seen in April. Positive figures for the gross domestic product will not come until the third quarter. Whilst the process of recovery in the German economy is dynamic, it is only just beginning. Capacity utilisation is still low. Industrial output in May was only at around 75% of its pre-coronavirus level; in the automotive sector, the figure was just less than 50% (approx. 74% in June according to VDA). Key factors influencing the future course of the macroeconomic recovery will include the pace of the recovery in foreign demand for German goods. The month of May did see a sharp (nominal) rise of 11.6% in exports of goods. But exports to key trading partners which have been particularly badly affected by the pandemic (e.g. the United States and the United Kingdom) are trending less strongly than those to other partners (e.g. China). There are also disparities in the levels of orders coming from abroad. Orders from the eurozone are indicative of a recovery, but the sluggish improvement in orders from outside the eurozone underline the risks posed to the German economy by the global economic situation.

Global economy: Indicators show severe recession

The global economic downturn was probably worse in the second than in the first quarter. There was a massive drop in global industrial output in April. Many countries in Europe and the rest of the world responded to the spread of Covid-19 by tightening their measures to protect against infection. April 2020 saw a fall in global industrial output of 12.1% compared with April 2019. The drop in global trade in goods was even greater. The year-on-year shrinkage in April was 16.2%. However, indicators of market sentiment are sending positive signals for the rest of the year. The global purchasing managers index (PMI) for industry was higher in May than it had been in February, but at 47.7 points remained below the threshold for growth of 50 points. Even if there is a rapid recovery, the global recession caused by the pandemic will probably be far more pronounced than the recession due to the economic and financial market crisis in 2008-2009.

National leading indicators on foreign trade and investment also improved. On balance, the ifo export expectations for the manufacturing sector brightened considerably in June. Nearly 20% of companies (May: approx. 14%) now expect the situation to improve within the next three months. New orders from abroad likewise recovered in May, albeit primarily from the eurozone, and less from third countries. This means that the outlook for German foreign trade is improving. In the course of the recovery in output and demand, both exports and imports are likely to see clear rises during the second half of the year.

German foreign trade registers initial improvement

In May, exports of goods and services recovered to some extent in seasonally adjusted terms and in current prices from their sharp falls in the two preceding months (April: -22.4%; March, -10.8%), with a rise of 7.7% from the April figure. However, this means that the level of exports of goods and services is only around 75% of the pre-crisis figure. The two-month comparison for April/May still shows a tangible decline, of 24.0%.

The different ways in which countries have been hit by the coronavirus pandemic is also reflected in the foreign trade statistics. Trade with countries which are particularly badly affected by the pandemic, including the United States and the United Kingdom, was much weaker than with countries reporting low rates of new infections, such as China.

The recovery in imports of goods and services was comparatively weak in May, at +3.0% against April in seasonally adjusted and nominal terms (April: -18.0%; March: -6.8%). In the two-month comparison, imports fell by an unprecedented 19.7%.

Industrial output recovering from low level – low-point has been passed

Output in the goods-producing industries has picked up significantly following the dramatic slump in the two previous months. In seasonally adjusted terms, it rose by 7.8% from April. Growth was particularly pronounced in the industrial sector, at 10.3%. The expansion in the construction sector was comparatively moderate, at 0.5%. The growth in industrial output was largely driven by the resumption of automotive manufacturing, which had basically ground to a halt in April (approx. +216%). Despite this, the amount of vehicles produced in May was roughly half that of May 2019. Sharp increases in production were also reported in the key areas of mechanical engineering and the production of electrical equipment (+9.8% and +4.7% respectively); however, the respective indexes are still down to around 79% and 84% of the preceding year’s levels. New manufacturing orders saw a monthly rise of 10.4% in May (April: -26.2%). Here, orders of capital goods expanded significantly, by 20.3% (vehicles: +44.4%), whilst smaller increases were recorded for consumer and intermediate goods, of 4.7% and 0.4% respectively.

The statistics for May on production and new orders indicate that the industrial sector has emerged from the worst of the recession. The ifo business climate and the PMI for industry also improved substantially in May and June. The continuing low level of production and new orders does however show that the recovery has a long way to go. Also, the ongoing weakness in orders from outside Europe still poses a risk to the future recovery.

The retail recovery has begun

May saw a clear rise in consumption as shops re-opened. Retail sales (excluding vehicles) rose by 13.9% between April and May. In particular, retail sales of textiles, clothing and shoes rose by 173%, but were still well below the level seen in May 2019. Trade in furnishings also picked up strongly, at +42%, with turnover already exceeding the previous year’s figure. Online trade saw a second successive monthly rise of more than 10% (April +11.3% and May +11.5%). However, new registrations of cars by private owners remained roughly at the previous month’s level, i.e. below the pre-crisis level. The ifo business climate in the retail trade improved appreciably in June, even if it remained negative. The GfK consumer climate index recovered further in July. Consumer prices picked up between May and June, rising by 0.6%, not least due to package tours, which have become possible again but are considerably more expensive. The inflation rate rose to 0.9% in June (May: 0.6%). The core inflation rate (excluding energy and food) saw little change, moving from 1.2% in May to 1.3% in June.

Rise in unemployment much weaker than in preceding months

In the reference month of June, the pandemic-related problems on the labour market lessened. Seasonally adjusted unemployment rose by 69,000 persons, i.e. by much less than in April and May (+372,000 and +237,000 respectively). At 2.85 million, the number of persons registered as unemployed (unadjusted figure) was still 637,000 higher in the year-on-year comparison. The massive use of short-time work is preventing a sharper rise. The notifications of cyclically-related short-time work referred to 342,000 people in June, fewer than in the previous months (May: 1.14 million people; March/April: 10.66 million people). Particularly large numbers were reported in the metal industry, vehicle construction, the hotel, restaurant and catering industry, and “other services”. At present, figures for actually realised short-time work are only available for April. These show that 6.8 million people received short-time work benefits for cyclical reasons. That number was far higher than the highest figure seen during the economic and financial crisis in 2008/2009. Preliminary estimates by the Federal Employment Agency suggest that May saw rather fewer people in short-time work, at around 6 million people.

May also registered a month-on-month decline of 314,000 persons in seasonally adjusted employment figures for Germany, following a drop of 273,000 people in April. These were the sharpest falls since German reunification. A downward revision of the employment figures for April is however likely. It can therefore be expected that the decline in May has already flattened out in comparison with the preceding month. Employment subject to social insurance payments shrank by 276,000 people in the lockdown month of April (March: -42,000), with the manufacturing industry, the hotel, restaurant and catering industry, seconded workers and the wholesale and retail sectors being particularly affected. The leading indicators have recovered to some extent, but are not indicative of a sustained recovery within the next few months.

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[1] The report is based on statistical data that were available as of 10 July 2020. 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.