- The German economy was able to continue its recovery. However, the partial lockdown that began in November, followed by the hard lockdown that was recently announced, is likely to put a stronger damper on cyclical development in Q4.
- Industrial output continued to grow in October. Strong momentum for growth came from the important automotive sector. Order book entries suggest that the industrial sector is set to continue its recovery, but the pandemic situation may slow down this development.
- Retail turnover (excluding motor vehicles) recently saw a slight upward trend. The number of monthly new-car registrations by private households almost reached the mark of 120,000 in November, well above the monthly average for 2018 and 2019. The latest leading indicators, however, suggest that the consumer climate is worsening.
- So far, the new partial lockdown has not affected the job market. The positive development regarding unemployment figures, short-time work, and gainful employment continued in November (in some cases, October figures).The significant increase in registrations for short-time work in November indicates that the number of people in short-time work is on the rise.
Overall situation: recovery fraught with uncertainty
The economic recovery process has been continuing, but the pandemic situation poses a risk. Following a historic 9.8% drop in GDP in Q2, the German economy experienced a palpable recovery in Q3, growing by 8.5%. This allowed economic output to reach approx. 96% of the level posted in Q4 2019, before the outbreak of the pandemic. In October, economic output largely continued to grow. Industrial production had a strong boost from the automotive industry, which saw another sharp expansion. Most other industrial sectors also increased their output. New orders in the manufacturing sector even topped the level of Q4 2019 by approx. 3%. Other economic indicators are also pointing upwards, with October being the sixth consecutive month of export growth. The retail sector was also able to once again increase its turnover in October. Gainful activity and employment subject to social security contributions also grew, whereas unemployment decreased markedly in November.
Looking forward, however, the outlook is less bright. The ifo business climate softened in November and is now slightly negative, overall. The balance was tipped by the business expectations, which, like export expectations, are now considerably gloomier. The partial lockdown in force since the beginning of November and the additional measures adopted with a view to limiting social contacts mainly hit the hospitality sector and business in the fields of leisure and tourism. Now that a hard lockdown has been put in place, other sectors are also affected. The cautious export expectations chiefly reflect the force of the second pandemic wave that has hit a number of European countries. Altogether, it is likely that economic growth in Germany in Q4 will be much dampened.
Global recovery continues to be overshadowed by the pandemic
The global economy is continuing to recover, but the sentiment indicators are less optimistic. Global industrial output expanded for the fifth consecutive month in September, growing by 0.9%. It has reached more than 98% of the figure for the preceding year again. Similarly, global trade is also inching closer to the level of the preceding year (+2.1% in September, now at more than 98%). However, the sentiment indicators suggest that the global recovery process is about to slow down. For instance, the combined J.P. Morgan / IHS Markit purchasing managers’ index fell slightly in November, but, at 53.1 points, remained above the growth threshold of 50 points. The sub-index for the industrial sector is looking much more positive than the one for services. The way in which the pandemic is unfolding and the lockdown measures imposed in many countries are likely to have played a role in this, as these measures primarily affect services.
Mild continued recovery in foreign trade
Exports and goods and services continued to recover in October, albeit at a lower speed. In October, the value of these exports grew by 1.5% over the preceding month (in nominal terms and adjusted for season), a sixth consecutive rise. In the two-month comparison, there was a marked increase of 3.7% between July/August and September/October. Imports of goods and services rose only slightly between September and October (+0.7%). The two-month comparison shows an increase of 2.4%.
The accelerated pandemic development and the lockdown measures taken by important trading partners are only partly reflected in the national leading indicators on foreign trade and investment, which paint a mixed picture. The ifo export expectations of the manufacturing sector for the next three months had already slowed down in October and now became negative on balance in November. The main factor in this development is the strong second pandemic wave that has hit many European countries. However, the volume of new orders from abroad continued the upwards trend begun in May, growing by 3.2% in October. The prospects for Germany’s foreign trade are weakened by the measures taken in response to the pandemic. This is likely to affect services more than manufacturing.
Industrial production receives strong boost from automotive sector
Manufacturing output continued its recovery in October. It grew by 3.2% compared to the preceding month. The figure for September was revised upwards to 2.3%, following a revision of the data. Both the industrial and the construction sectors increased their output in October (+3.3% and +1.6% respectively). Much of the growth in the industrial sector can be attributed to the automotive sector, which expanded its output by 9.9%. Most other branches of the industrial sector also recorded growth. In the two-month comparison, manufacturing output grew by 4.1% between July/August and September/October. During the same period, the industrial sector and construction posted growth rates of 4.0% each, and the energy sector expanded its output by 5.9%.
New orders in the manufacturing sector continued the recovery the sector began in May 2020, growing by another 2.9% in October. The two-month comparison shows an increase of 5.0%. Domestic orders and orders from outside the eurozone grew faster than those from the eurozone. Altogether, orders in October topped the level reached in the last quarter before the crisis, Q4 2019, by 3%. The figure for motor vehicles is even as high as 8%, and the one for machinery is just below 5%.
The manufacturing sector is steadily working itself out of the crisis. Recently industrial output was close to 96% of the level reached in Q4 2019. Even though the level of new orders points to a continuation of the recovery process, future developments of industrial output remain uncertain as a result of the pandemic and the lockdown.
Retail slightly looking up
Retail turnover has been well above its pre-crisis level since May. In October retail turnover (excluding motor vehicles) grew by 2.6%, following a 1.9% decline in the preceding month. Trade in motor vehicles was up 1.9% in September, following a 3.9% decline in August and a very strong boom of 23.0% in July. Performance here was once again palpably above the level of February, prior to the coronavirus pandemic. Private new car registrations rose by 14% in November (October: +2.3%). The number of private new car registrations reached a figure of close to 120,000 cars per month, which is well above the monthly averages for 2018 and 2019.
The leading indicators factor in the pandemic situation of the past few weeks and the partial lockdown, but not the hard lockdown that was agreed on 13 December. The ifo business climate in retail fell by a palpable margin in November, with negative expectations now dominating the positive. The GfK consumer climate index is expected to fall further in December.
Consumer prices in November fell by a tangible 0.8% compared to October. In the preceding months, the temporary reduction of VAT rates, which has largely been passed on to consumers, had had a palpable dampening effect on prices. The main reason for the most recent drop in prices, however, was package holidays, prices for which fell considerably compared to the preceding month, not least because demand is much lower than is the norm for this season. The inflation rate, i.e. the overall price level compared to the preceding year, was -0.3% (October: 0.2%). This makes it the lowest inflation rate to be recorded since January 2015. Prices for energy products and package holidays fell by 7.7% and 4.4% respectively. The price development for food items remained stable at +1.4% and 1.3%; for services, there was a slight increase to 1.1%. The core inflation rate (excluding energy and foodstuffs) remained stable again in November, at +0.5%.
Less of an impact on the job market – but short-time work likely to be used more in the time to come
Along with the recovery in Q3, the situation on the job market has also brightened up. There has been a slight rise in employment since the summer and unemployment and underemployment are falling, as is the level of short-time work. However, the level of short-time work is set to rise again after the partial lockdown. October was the fourth consecutive month in which there was an increase in gainful activity (+20,000). Demand for workers is, however, rather low – also as a result of low fluctuation. Employment subject to social security contributions saw quite a robust rise in September (+31,000, adjusted for season). Short-time work was used by 2.2 million employees in September, which is approx. 330,000 less than in August. However, the number of notifications for short-time work saw a significant rise again between 1 and 25 November (537,000 persons). Registered unemployment dropped by 39,000 in October (figure adjusted for season). According to the unadjusted figures, unemployment fell to 2.70 million. Year-on-year, the gap has lowered by almost 120,000 since the summer, to a figure of +519,000 people. The leading indicators by IAB, ifo and the Federal Employment Agency, all of which are based on surveys, all saw a slight increase at the start of the partial lockdown.