Wachstumskurve mit Kugelschreiber symbolisiert die wirtschaftliche Lage.

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  • After GDP contracted by 1.8% in the first quarter of 2021 as a result of the third wave of infections, it seems that economic activity will have recovered strongly in the second quarter. Given the pace of vaccinations, which is driving down the number of infections, economic activity is likely to pick up further speed over the course of this year.
  • Industrial output fell slightly in April, with the construction industry in particular recording negative growth. This is due to a shortage of intermediate goods. Despite a slight month-on-month contraction in the number of new orders, the total number of orders continues to be high. This latest flat development was caused by weak domestic demand that coincided with strong demand from abroad. Business sentiment continued to improve.
  • Retail sales once again fell in April. However, given the more favourable development of the pandemic, the outlook for the coming months is a lot more optimistic. The inflation rate reached a new record high in May due to a number of special factors (raw materials prices, carbon pricing). In the second half of the year, the base effect from last year’s temporary reduction of VAT rates is likely to result in inflation rates as high as around 3%. However, once the special factors disappear, the inflation rate is likely to once again fall considerably at the beginning of 2022.
  • The signals from the labour market continue to be encouraging. Unemployment fell sharply in May in seasonally adjusted terms and gainful employment continued to pick up in April in seasonally adjusted terms. The number of persons in short-time work continued to fall in March, and the number of short time work notifications point to a further decrease in the future.
  • The rise seen in the number of companies filing for regular insolvency in February and March did not continue, with figures down significantly in April. Overall in 2021, however, a significant rise in the number of companies filing for insolvency is to be expected.

SURGE IN ECONOMIC OPTIMISM DESPITE SUPPLY CHAIN ISSUES

The signs of economic recovery can no longer be overlooked: the business climate in the industrial sector has steadily improved in the last few months and the services sector has also been a lot more optimistic recently. The German economy is slowly recovering from the third wave of infections, enjoying a surge in economic optimism. Industrial activity continues to be robust; however, it is slowed down by individual sectors. Manufacturing output contracted at the beginning of the second quarter as some sectors are experiencing shortages in the supply of intermediate goods. Among the goods most needed are semiconductors for the automotive industry and lumber and other materials for the construction sector. This means that the latest decline in industrial output is not due to a lack of demand. The opposite is the case: new manufacturing orders have stabilised at a high level and have stayed above their pre-pandemic (February 2020) level for seven consecutive months. Sentiment among German exporters also continues to be very favourable even though automotive companies are expecting to face problems in the coming months. German exports of goods have increased for twelve consecutive months and surpassed their pre-crisis level (Q4 2019 average) for the second consecutive month. Given the favourable economic environment, the outlook for German exporters remains positive. Global industrial output has shown an upward trend since May 2020 and global trade reached a new record high above its pre-crisis level. The services sector is rebounding. The business climate reached its highest level since February 2020, not least due to greatly improved expectations for the coming months. Hospitality and tourism are once again cautiously optimistic and retail traders can expect a further easing of measures to take place. In light of the more favourable development of the pandemic, GfK’s consumer sentiment index is expected to improve in June. The signals from the labour market continue to be positive, with the recovery expected to continue. Since May 2020, the willingness to recruit new staff has continuously improved in the industrial sector and has shot up in the services sector. Given the generally favourable economic situation, the second quarter is expected to see strong growth, which will accelerate further in the second half of the year. However, despite the more favourable development of the pandemic, efforts to combat the pandemic need to be sustained. With an ever larger share of the German population vaccinated, a further easing of the restrictions can be expected. However, attention will need to be paid in the coming months to the impact of new virus variants.

POSITIVE OUTLOOK FOR THE GLOBAL ECONOMY

The global economy continues its upward trend. After dropping in February, global industrial output in March returned to the positive trend seen since May 2020 (March: +0.3%, February: -0.6%, both month-on-month). Global trade grew strongly, reaching a new record high above its pre-crisis level (+2.2%). Sentiment indicators suggest that the global economy will continue to grow. The J.P. Morgan/IHS Markit composite purchasing managers’ index improved in May for the third consecutive month. At 58.4 points (April: 56.7 points), the index is well above the growth threshold of 50 points. The successful rollout of vaccinations around the world again boosted sentiment among service providers, whilst expectations in the industrial sector remained almost unchanged. This is likely due to the current shortages in the supply of important intermediate goods such as semiconductors and lumber.

EXPORTS STAGNATE JUST UNDER PRE-CRISIS LEVEL

German foreign trade has recently not been able to sustain the pace of recovery seen in spring. In April, the value of goods and services exports remained relatively stable, both adjusted for seasonal variations and on a nominal basis, falling by a slight 0.1% compared with the preceding month (March: +1.6%). The two-month comparison shows a significant 2.2% rise in exports. Following a strong increase in February (+6.0%), imports contracted by 2.3% in April The two-month comparison shows a rise of 6.5%.

The leading indicators on German foreign trade and investment reflect the dynamic development of global trade. New orders from abroad grew almost as strongly in April as they did in March (+2.7%). Ifo’s export expectations for the manufacturing industry fell slightly in May, but almost maintained their previous level close to the peaks reached in 2011. This means that the outlook for Germany’s foreign trade remains positive, not least thanks to the strong growth registered by important sales markets in Asia and the United States.

SMALL DIP IN INDUSTRIAL ACTIVITIY AT THE BEGINNING OF THE SECOND QUARTER

Manufacturing output in April saw another drop compared with the preceding month, falling by 1.0%. In March, output expanded by 2.2%, following a decline of 1.9% in February and of 2.2% in January. Industrial output saw a small contraction of 0.7% (March: +0.7%; February: -1.9%), whilst construction output fell sharply (-4.3%). Following dips at the beginning of the year due to cold weather (January: -10.7%, February: -1.4%), it had seen a brief but strong recovery (+9.8%) in March.
The two-month comparison for March/April compared with January/February showed a slight expansion in the goods-producing sector of 0.6%. Whilst industrial output fell by a slight 0.5%, construction output picked up strongly, growing by 6.6% in the two-month comparison due to a weak January marked by cold weather and a strong March. Within industry, the important sector of cars and car parts recorded a sharp drop of 5.6% in the two-month comparison. By contrast, the equally important mechanical engineering sector contracted only slightly compared with the preceding month (-0.3%).

In April, new orders in the manufacturing sector fell slightly (-0.2%). However, this can be interpreted as a stabilisation of new orders at a high level following several months of strong growth. The latest flat development was caused by weak domestic demand ( 4.3%) that coincided with strong demand from abroad (2.7%). New manufacturing orders have been above their pre-crisis level for seven consecutive months.

Following the rise in March, the industrial sector contracted slightly in April, due to a shortage in the supply of intermediate products (including in particular semiconductors and lumber). Nevertheless, the positive development of ifo’s business climate index and the continued high level of new orders create a positive outlook for the industrial sector in the coming months.

RETAIL TRADE SITUATION SOMEWHAT DETERIORATES BUT OUTLOOK IS CONSIDERABLY MORE OPTIMISTIC

Retail sales (without cars) are once again falling. Following an increase of 7.7% in March, April saw a month-on-month contraction of 5.5%. The month-on-month comparison was significantly marked by the nationwide COVID-19 restrictions adopted in April and weak Easter sales in March due to the pandemic. Retail sales have recently only been slightly (-0.8%) below the level registered in February 2020 – the last month before the onset of the COVID-19 crisis. Trade in textiles, clothing and shoes and also e-commerce and mail order services fell sharply, contracting by 36.1% and 4.8% respectively. New vehicle registrations by private owners saw a slight increase in May (+1.2%). Whilst the number of new registrations still falls considerably short of the sales figures seen in the second half year of 2020 when VAT rates had temporarily been reduced, they are still well above the lowest level recorded during the crisis, which was in April 2020.

Ifo’s business expectations for retail trade were virtually balanced in May, after having been less optimistic before. With the number of infections down and the vaccination campaign picking up speed, GfK’s consumer sentiment index also showed a surge in economic optimism.

Consumer prices were up 0.5% in May, compared to the preceding month. This compares to a 0.7% increase between April and May. The inflation rate, the year-on-year development of prices, stood at 2.5% in May. It has risen sharply since the beginning of the year after having been negative for almost the entire second half of 2020, due to the reduction of VAT rates. Reasons for the increase in the inflation rate in the first months of this year include the recovery in import and raw materials prices, and the introduction of carbon pricing. Unlike last year, when energy prices put a strong damper on consumer prices, they are now among the factors pushing up the inflation rate. In the second half of the year, the inflation rate is likely to increase to around 3% due to the base effect created by the temporary reduction of VAT rates in July 2020. Once these special effects disappear from the inflation statistics at the turn of the year, the upward trend in consumer prices will weaken again. As there are currently no indications of a wage-price spiral – which can cause a permanent increase in inflation – the inflation rate is currently not expected to continue to rise. The core inflation rate (without energy and seasonally dependent foods) rose to +1.9% in May (up from +1.3% in April) as prices for many goods and services increased year-on-year.

SUSTAINED RECOVERY OF THE LABOUR MARKET

The signals from the labour market continue to be encouraging. With infection rates falling, the recovery could pick up further speed in the coming months. One year into the pandemic, COVID-19 is still leaving a strong mark on the labour market. Unemployment and underemployment fell in May (in seasonally adjusted terms), decreasing by 15,000 persons and 20,000 persons respectively. According to the original data, unemployment fell markedly by 84,000, to now stand at 2.69 million people. The year-on-year gap was negative for the first time since September 2019 (-126,000 people), which is partly due to the base effects of last year. Gainful employment continued to increase slightly by 10,000 in seasonally adjusted terms, and the demand for workers picked up in May. Employment subject to social security contributions rose by 38,000 persons in March (seasonally adjusted). Extrapolations show that 2.6 million people were in short-time work in March, a lot fewer than in the preceding month. Short-time work notifications (around 96,000 between 1 and 26 May compared with 154,000 in April) indicate that the use of the short-time work scheme will continue to slow. The survey-based leading indicators of the Institute for Employment Research and ifo developed very favourably again in May, reaching their highest scores since June 2019 and March 2018 respectively. In the industrial sector, employers’ willingness to recruit new staff has kept rising since May 2020, and there was also a clear jump upwards in the services sector. Trade is cautiously optimistic whilst the willingness to recruit new staff in the construction industry remains subdued.

RISE IN INSOLVENCY PROCEEDINGS COMES TO A HALT FOR NOW

The number of regular insolvency proceedings once again fell in May. The Federal Statistical Office announced a 7% reduction in the number of companies filing for insolvency compared to the preceding month. April had already seen a decline of 17%. This shows that the strong rise in insolvency proceedings recorded in February and May no longer continued. The fall in the number of insolvency proceedings is backed up by the figures published by the German Economic Institute (IW) in Halle and HU Berlin. But even though it has so far been possible to stave off a large wave of insolvencies by loosening the rules governing notification requirements, and by supporting companies on a large scale, a marked rise in the insolvency figures must be expected over the year. Experts believe that there will be between 3,000 and 7,000 more insolvencies than in the preceding year.

[1] Press release by the Federal Statistical Office of 25 May 2021.
[2] The report is based on statistical data that was available as of 11 June 2021. 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.