The economic situation in Germany in November 2021

• The current supply bottlenecks for intermediates and raw materials have become even more acute. They are hampering the German manufacturing industry. Industrial output continued to decline in September. Despite the high volume of orders, industrial activity is likely to remain subdued into next year. By contrast, companies in the service sector benefited from the relaxations of measures undertaken to curb the pandemic and again assessed their situation as better. In view of the current situation with respect to the pandemic, however, the risks have increased again. Overall, economic output is likely to increase only slightly in the final quarter of the year.
• Industrial output continued to decrease in September. Although the automotive industry was able to increase its output again, the mechanical engineering, electrical equipment, data processing equipment and metal products sectors reported declines. Despite high demand, the outlook for industrial activity has worsened.
• Retail sales fell again in September, but again remained above their pre-crisis levels from February 2020.
• At 4.5%, the inflation rate was at a high level in October. It has been considerably elevated since the beginning of the year, due to special factors, but it soared as expected in the middle of the year due to a base effect caused by the temporary reduction in sales tax rates. At the beginning of next year, once these special effects cease to exert their influence, the upward trend in consumer prices is likely to weaken again significantly.
• The recovery of the labour market continued at a moderate pace. In October, unemployment fell once again, with levels of gainful activity continuing to see a positive development in September (all in seasonally-adjusted terms). The number of people in short-time work fell to 0.8 million in August and is likely to have fallen further in September.
• In 2021, the number of corporate insolvencies is expected to be lower than in the previous year, reaching a new record low. From January to August, there were only 9,637 corporate insolvencies – 16% fewer than in the same period last year – and there are also no signs of the figures increasing this autumn. It is not expected for there to be major pent-up demand in the coming year either.

THE ECONOMIC RECOVERY IS CONTINUING, BUT CURRENT DEVELOPMENTS IN THE COVID-19 PANDEMIC ARE CREATING FURTHER RISK

The German economy is continuing to grow. Economic output grew by 1.8% in the third quarter, following an increase of 1.9% in the second quarter. However, industrial activity will continue to be held back for the foreseeable future due to ongoing bottlenecks in intermediate products. This is especially true for the automotive industry, a key sector which is suffering from a shortage of semiconductors. Despite the continued high global demand for German goods, the manufacturing sector is therefore unable to ramp up output to a greater extent. Most recently, industrial output has declined even further. However, the domestic economy and, to a large extent, also the service sector have recovered significantly. Although the economic outlook for the domestic economy and the service sector has deteriorated somewhat due to the recent developments regarding the pandemic, the service sector is expected to offset for the weakness in the industrial sector in the course of the rest of the year. Overall, however, gross domestic product is likely to increase only slightly in the final quarter of the year. Next year, the economic recovery will accelerate significantly, as the supply bottlenecks in industry are gradually overcome. The inflation rate has continued to rise until recently. In this regard, too, the shortages of raw materials and intermediate products are being increasingly felt. Next year, it is expected that there will be a noticeable drop in the inflation rate as significant special factors such as the temporary reduction in sales tax rates introduced in the second half of last year, the sharp rise in world market prices for raw materials and the increase in the cost of energy as part of the climate package will no longer figure in the year-on-year comparison. This assessment is shared by the vast majority of economic experts, as evidenced by the current forecast range. The recovery of the labour market continued, with another fall in unemployment, albeit with reduced momentum. Gainful employment continued to develop positively and unemployment again dropped noticeably. Short-time work was further reduced, although supply bottlenecks led to an renewed increase in notifications of short-time work in the manufacturing sector. Leading indicators suggest that the upturn on the labour market will continue at a slower pace in the coming months.

GLOBAL ECONOMY REMAINS SUBDUED

Following a weak performance in the second quarter, global industrial output and trade in goods were rather weak in the middle of the third quarter: global output fell 0.4% in August month-on-month (July: ±0.0%), likely due to continued shortages of key intermediate goods such as semiconductors. Global trade increased again, climbing 0.8%, although this comes after a decline of 1.4% in July. Much of the economic slowdown emanated from the developing world and from emerging economies, where measures to control the spread of COVID-19 were taken due to slow progress in vaccinations. In October, the J.P. Morgan/IHS Markit composite purchasing managers’ index for the global services sector rose by 1.8 points, reaching 55.6 points. In the industrial sector, however, the indicator of sentiment rose only slightly, rising 0.2 points to 54.3 points. The composite index thus increased again (+1.2 points to 54.5 points) and was well above the growth threshold of 50 points.

EXPORTS AND IMPORTS INCREASING

In September, the value of goods and services exports rose slightly, creeping 0.4% month-on-month, in seasonally adjusted terms and in current prices (August: -1.8%). The quarterly comparison showed an increase of 1.1%. Given the stronger rise in export prices, however, it is likely that the export volume has shrunk in real terms. Imports of goods and services rose between August and September by 1.3% (seasonally adjusted and on a nominal basis), a similar rate to in August (+1.4%). Quarter-on-quarter, there was a rise of 4.2%. However, as import prices are rising sharply, it is likely that imports have slightly fallen in real terms.

The leading indicators for German foreign trade paint a mixed picture. New foreign orders increased by 6.3% in September compared with the previous month. However, this increase was preceded by a decline of 9.2%. A less volatile quarterly comparison shows an overall increase in foreign orders of 4.1%. Above-average large-scale orders are likely to have played a role in the development in demand over recent months. The ifo export expectations for the manufacturing sector suffered a significant setback in October, following a slight recovery in the previous month. The supply shortage for intermediate products is now also affecting industrial exports. Despite the supply bottlenecks, the overall outlook for German foreign trade remains positive. Global demand for German goods is at a high level.

DESPITE HIGH DEMAND, THE OUTLOOK FOR INDUSTRY REMAINS GLOOMY AS A RESULT OF THE SUPPLY BOTTLENECKS

Manufacturing output in September saw a drop compared with the preceding month, falling by 1.1%. While industrial output fell by 1.5%, the construction sector recorded a 1.1% increase. In the quarterly comparison, output in the goods-producing sector shrank by a total of 2.4% between the second and third quarters. Industrial output dropped by 2.4% and construction sector output by 2.1%.

New manufacturing orders rose between August and September by 1.3%, albeit following a drop of 8.8% in August. New manufacturing orders thus recently returned to the upward trend seen since the beginning of the year, with a moderate rise. The third quarter saw order growth of 1.0% over the second quarter. Excluding large orders, however, order activity dropped noticeably, falling 3.6%. The slight increase in orders in September was was driven by strong demand from outside the eurozone (+14.9%). However, domestic orders and orders from the eurozone declined by 5.9% and 7.3% respectively. Demand was mainly driven by the two major sectors – the automotive and mechanical engineering industries – while the non-automotive vehicle manufacturing, chemicals, IT and optics sectors strongly curbed the growth in demand. In the third quarter, manufacturing orders were at a high level and more than 13% above the pre-crisis level of the fourth quarter of 2019.

After declining significantly in August (-4.3%), industrial production decreased by a further 1.5% in September. The persistent supply bottlenecks affecting semiconductors and intermediate products as well as raw materials are now impacting across the economy. Although the automotive industry was able to increase its output slightly again in September, this key sector had recorded a drop of 18.9% in August. Other sectors reported declines. For example, mechanical engineering, a sector of similar importance, saw a drop of 3.3%, electrical equipment of 3.3%, data processing of 4.3% and metal products of 0.5%. While the sentiment indicators fell in October for the fourth month in a row, they had been improving almost throughout the whole first semester. Industry's export expectations received a heavy blow in October due to the supply bottlenecks for intermediate inputs. Until there is a lasting resolution of the shortages in raw materials and intermediate products, the outlook for industry will continue to be gloomy, even though the level of demand remains high.

RETAIL SALES DOWN AGAIN

Retail sales (excluding vehicles) fell by 2.5% in September, following a slight increase of 1.2% in August. Rising prices and uncertainty about infection levels may again have caused some uncertainty among consumers and retailers. Sales of textiles, clothing and footwear declined by 9.6% in September, falling significantly below the pre-crisis levels of February 2020 (-7.8%). Internet and mail order sales also declined by 2.0%, but still exceeded the pre-crisis level by a substantial margin (+27.2%). New car registrations by private owners saw a considerable drop in October, following five months of positive growth.

The leading indicators published by ifo and GfK on the future development in consumer spending recently sent mixed signals. The ifo figures for business expectations in the retail sector worsened slightly further in October, falling for the fourth month in succession. By contrast, the GfK consumer climate improved noticeably in October and was once again positive. A further increase is expected for November, as consumers' propensity to save is declining.

The consumer price level increased by 0.5% in October compared with the previous month (August and September: ±0.0% each). The inflation rate, i.e. the year-on-year development of the price level, increased in October by 0.4 percentage points to 4.5%. This was the highest value since August 1993. The inflation rate soared by 1.5 percentage points in July 2021, as had been expected. This sudden surge from the middle of the year was the result of a base effect caused by the temporary reduction in VAT rates in the preceding year. In other words, the current consumer prices – which include the regular VAT rates – are being compared with prices that were subject to reduced VAT rates. Other special effects that have also resulted in a considerable increase in the inflation rate since the beginning of the year include the recovery of import and commodity prices and the introduction of carbon pricing. Once these special effects cease to exert their influence at the end of the year, the upward trend in consumer prices is likely to weaken considerably. Also, the shortage of upstream goods such as semiconductors is likely to push prices up. The situation is expected to improve incrementally in the course of 2022. The core inflation rate (excluding energy and foodstuffs) also remained stable, at +2.9%. Energy prices recently saw a marked increase of 18.6% in year-on-year terms (September: +14.3%). Current developments on the commodity markets, however, suggest that the oil price will ease in the medium term. For food, the latest annual rate was 4.4% (September: 4.9%).

LABOUR MARKET RECOVERING AT A SLOWER PACE

The autumn pick-up on the labour market continued but was more moderate than in previous months. The upswing is likely to continue at a slower pace during the rest of the year. The ease of restrictions that had affected many services led to a reduction in unemployment and underemployment in October (-39,000 persons persons respectively), in seasonally-adjusted terms. According to the unadjusted figures, unemployment fell by 88,000 to now stand at 2.38 million people. Compared with the previous month, the number of unemployed persons was down by 383,000. Gainful employment and employment requiring compulsory social insurance payments again developed positively. Employment figures rose in September by 31,000 (seasonally adjusted). According to the unadjusted figures, there were 45.2 million people who were gainfully active, which is an increase of 267,000 year-on-year. In August, employment subject to social security contributions increased by 33,000 persons compared to the previous month. According to projections by the German Federal Employment Agency, short-time work decreased in August to 0.8 million people. The number of people in short-time work is likely to fall further in September, although in the manufacturing sector the number of notifications is rising again due to supply bottlenecks. The demand for labour continued to increase. The leading indicators published by ifo and the Institute for Employment Research (IAB) pointed to slightly weaker growth in demand in October. The ifo employment barometer showed a slight decline. The IAB barometer provides a positive outlook for employment and indicates a further decline in unemployment, albeit below the highs seen in the summer. The labour market recovery is therefore likely to continue at a slower pace in the coming months.

FEWER INSOLVENCIES THAN IN THE PREVIOUS YEAR

From January to August, the local courts recorded 9,637 corporate insolvencies. This is nearly 16% down on the previous year. The number of regular insolvencies, which rose by 6% in September and saw a sharp drop of 29% in October, and the insolvency indicator of the German Economic Institute (IW) in Halle do not point to an increase in insolvency figures in the autumn either. For 2021 as a whole, it is therefore likely that the number of corporate insolvencies will once again be below the previous year's figure, reaching a new all-time low. It is also not expected that there will be strong pent-up demand in the coming year. In contrast to previous economic crises, an increase in insolvencies was able to be prevented.