The economic situation in Germany in December 2024
- The German economy stagnated in the third quarter according to the revised GDP figures from the Federal Statistical Office. While there were losses in the manufacturing, construction, and business-related services sectors, there were increases in public services and consumer-oriented service sectors (hospitality, retail). This suggests a reduction in the reluctance to spend by private households, not least due to significant increases in nominal and real wages. However, the renewed deterioration of recent sentiment indicators and the ongoing high geopolitical and domestic political uncertainties still make it difficult to foresee a sustainable economic recovery.
- Production and orders started with declines in the final quarter. The industrial economy remains in a downturn. However, in the less volatile three-month comparison, the decline in production in the manufacturing sector was only -0.4%, not as sharp as previously, and order intake in manufacturing even rose by 2.7%. Nevertheless, the renewed deterioration of sentiment indicators from ifo, S&P Global, and ZEW suggests that a sustainable trend reversal in the industry is not yet expected.
- The situation in retail (excluding motor vehicles) has changed little recently. Price-adjusted retail sales (excluding motor vehicles) fell by 0.5% in October compared to the previous month, but were 2.2% higher than in the same month last year. Private new car registrations, after a significant increase in October, remained almost unchanged in November (+0.3%). Given increasing concerns about job security and ongoing geopolitical uncertainties, a sustainable recovery of consumer sentiment is likely to be delayed for the time being.
- The inflation rate rose slightly to 2.2% in November as expected. However, compared to the previous month, consumer prices fell by 0.2%. The increase in the annual rate over the last two months is mainly due to the disappearing base effect of energy and package holidays. The inflation rate averaged 2.2% for the first eleven months of the year.
- Economic weakness continues to shape developments in the labor market. In October, the number of employed persons decreased slightly seasonally adjusted, and unemployment rose in November. At the same time, short-time work increased significantly in November. Given the declining demand for labor and announcements of job cuts in the manufacturing sector, the weak labor market trend is expected to continue in the coming months.
- According to the IWH Insolvency Trend, insolvency numbers in November were slightly lower but remain at a significantly elevated level. In November, there were 1,345 insolvencies of individuals and corporations, a decrease of 12.1% compared to the previous month, but still 37.7% higher than in the same month last year. The IWH expects persistently high insolvency cases in the coming months, noticeably above the average levels of the pre-crisis years from 2016 to 2019.
No noticeable economic recovery in sight yet
At the end of the year, the German economy remains in a weak starting position. The Federal Statistical Office revised its preliminary estimate for the price-, calendar-, and seasonally adjusted GDP in the third quarter down by 0.1 percentage points, now showing +0.1% compared to the previous quarter. On the production side, price-adjusted value added decreased by 0.2%, with significant declines in manufacturing, construction, and business-related services. In particular, economically significant sectors such as capital goods producers and energy-intensive industries continued to decline due to weak order levels, increased competition, and structural challenges.
There were increases in public services, education, and healthcare, as well as in consumer-oriented service sectors (hospitality, retail). The latter is seen as a positive development: In the third quarter, the strong nominal wage increase of 4.9% compared to the previous year, along with the lower consumer price rise and the sixth consecutive increase in real wages (+2.9%), seemed to noticeably impact private consumption. As a result, both government and private consumption slightly increased on the demand side. However, investment activity and the external contribution had dampening effects in the third quarter, while inventory changes significantly contributed to the positive comparison to the previous quarter.
After a brief improvement, the mood in the German economy and among consumers soured again towards the end of the year due to increased geopolitical and domestic political uncertainties. For example, the ifo Business Climate Index decreased again in November, with companies especially more cautious in assessing their current situation, while expectations fell only slightly. Recent ZEW economic expectations and the GfK consumer climate also declined. Against this backdrop and considering the high uncertainties regarding future geopolitical developments, potential tariff hikes by the incoming US administration, and upcoming elections in Germany, a sustainable economic turnaround is currently not in sight.
Global economic dynamics remain robust despite increased trade policy uncertainty
Global industrial production remains subdued. In September, it decreased by 0.1% seasonally adjusted compared to the previous month, but was up by 1.6% compared to the same month last year. For the future, moderate expansion of the global economy is expected. The S&P Global sentiment indicator increased slightly to 52.4 points in November, up from 52.3 in October, and the Purchasing Managers’ Index for industry rose above the growth threshold of 50 points for the first time in four months. However, the sentiment indicator for the services sector remains higher, with 53.1 points indicating stronger growth momentum. However, the Purchasing Managers’ Indices in key trading partner countries of Germany, such as France, the Netherlands, or Italy, have recently declined, and the SENTIX Economic Index for the global economy fell slightly by 0.3 points to 5.3 in December. Nevertheless, international organizations like the IMF and OECD still expect robust global economic activity in the next two years, initially driven by private consumption, with growth rates across regions expected to converge as the EU countries recover.
Global merchandise trade declined slightly by 0.9% seasonally adjusted in September after a significant increase in the previous month but is 2.4% above the level of the same month last year. The dynamics of the RWI/ISL container throughput index also slowed slightly in November, falling from 132.3 to 131.7 points. While recovery continued in European ports, with a significant increase in the North Range index from 111.6 to 113.4 points, the economic weakness in China seems to have affected container throughput there (-2.4 points to 143.1 points). Despite the increased trade policy uncertainty due to the US administration’s announcement of tariff hikes, international organizations still expect global trade to grow at a rate of around 3.5% in the next two years, supported by trade between emerging markets.
Downward trend in foreign trade continues
Germany’s foreign trade continues to be in a weak phase. In October, nominal exports of goods and services fell significantly by 3.2% seasonally and calendar-adjusted compared to the previous month, after already declining in September. Besides a noticeable drop in goods exports by 3.6%, service exports also decreased by 1.7%. In the less volatile three-month comparison, the decline in exports was somewhat smaller at -1.5%. Meanwhile, imports of goods and services decreased by 1.3% compared to the previous month, seasonally and calendar-adjusted, although in the three-month comparison, they showed a slight increase of 0.4%. Due to the significantly weaker development of exports compared to imports, the monthly trade balance surplus in October seasonally adjusted fell from €11.2 billion to €8.3 billion, the lowest level since October 2022.
Import prices rose by 0.7% seasonally adjusted in October after previous declines, mainly due to higher prices for imported energy and intermediate goods. Export prices also increased by 0.3%, leading to a 0.5% deterioration in the terms of trade compared to the previous month. In real terms, the declines in exports and imports may have been even more pronounced.
Early indicators continue to show mixed signals, but more recently, slightly more positive ones. Foreign order intake increased by 0.8% seasonally adjusted in October compared to the previous month, with demand from outside the Eurozone rising significantly by 6.3% compared to September. In the less volatile three-month comparison, foreign orders increased by 8.6%. The ifo export expectations also improved slightly in November, from -6.5 to -5.9 balance points. Particularly the metals industry, but also the automotive and mechanical engineering sectors, continue to expect lower exports. Overall, while there is uncertainty among businesses due to the US administration’s trade policy, the strengthening of the dollar also presents opportunities for German exports.
German exporters are currently operating under heightened uncertainty. Furthermore, global industrial economic activity remains subdued, providing little momentum for German goods exports. With the weak start to the fourth quarter, there are currently no signs of anticipatory effects in German exports due to potential US tariff increases next year. Overall, current data does not suggest an imminent trend reversal for export business.
Production and Orders Decline in the Final Quarter
Production starts with a slowdown in the final quarter of this year. In October, production in the manufacturing sector decreased by 1.0% compared to the previous month, after adjusting for price, calendar, and seasonality. In September, the output had already fallen by 2.0% according to revised data from the Federal Statistical Office. The new decline was primarily due to a sharp drop of 8.9% in the energy sector. Industrial output, however, only decreased slightly by 0.3%, while construction remained stable.
At the level of individual sectors, a negative development is evident across the board: Key sectors such as mechanical engineering (-1.1%), manufacturers of vehicles and vehicle parts (-1.9%), metal products (-1.7%), and chemical products (-1.4%) reported significant production losses. Only a few industries saw production increases, including producers of electrical equipment (+3.0%), glass, glassware, ceramics, and stone and earth processors (+2.2%), and the metal production and processing sector (+0.5%).
Order intake in manufacturing dropped by 1.5% in October compared to the previous month, after adjusting for price, calendar, and seasonality. However, according to significantly upwardly revised data, it had risen by 7.2% in September. Domestic orders fell by 5.3% in October, while foreign orders slightly increased by 0.8%. Excluding the highly volatile large orders, total order intake remained nearly unchanged (+0.1%) compared to the previous month.
Large orders with their strong monthly fluctuations continue to shape the development of incoming orders. This is particularly evident in the “other vehicle construction” sector, which saw a decrease of 7.0% in October after an unusually large increase of 175.7% in September. Other manufacturing sectors also saw declines in October, including mechanical engineering (-7.6%), vehicles/vehicle parts (-3.7%), electrical equipment (-2.7%), pharmaceutical products (-0.8%), and chemical products (-0.4%). On the other hand, sectors like metal production (+10.2%), data, electrical and optical devices (+8.0%), and metal products (+4.1%) experienced growth.
Overall, a mixed indicator situation is emerging when looking at a multi-month period. Although order intake in manufacturing rose by 2.7% in the less volatile three-month comparison, the decline in production in the manufacturing sector eased to -0.4% in October. However, business sentiment has recently darkened again, according to indicators from ifo, S&P Global, and ZEW. Business planning is likely to become more challenging due to increased political uncertainty following the US presidential election results and the end of the governing coalition in Germany. This is likely to further delay a sustainable economic turnaround in the industrial sector.
Retail Stagnates
In October, seasonally and calendar-adjusted retail sales (excluding cars) decreased by 0.5% compared to the previous month. However, compared to the previous year, retail sales increased by 2.2% in real terms. Food retail sales increased by 0.5%, while online and mail-order sales, after significant gains in previous months, declined by 2.0%. However, compared to the previous year, online sales rose by 9.2%. In 2022 and 2023, the online sector had experienced substantial sales declines due to the end of COVID-19 measures and high inflation. In the hospitality industry, sales decreased by 6.5% year-on-year in September (-1.0% compared to the previous month), and nominally they were 3.1% lower (-0.2% compared to the previous month). Negative effects may have been caused by price increases and reduced consumer spending in the hospitality sector, as guest overnight stays only slightly decreased compared to the previous year.
New car registrations were significantly higher in October, both compared to the previous month (+11.7%) and the previous year (+6.0%), and stabilized in November (+0.3%). In the more meaningful three-month comparison, registrations increased by 6.2%. New car registrations by private individuals saw a slight increase of 0.4% in November compared to the previous month. Over three months, the number of registrations increased by 8.2%. New car registrations by businesses and self-employed individuals increased by 0.3% in November, and were 4.1% higher than in the same month of the previous year.
The sentiment of private households in Germany, as measured by the HDE Consumer Barometer and GfK Consumer Climate, has recently been mixed. According to GfK’s forecast, consumer confidence will decline by 4.9 points to -23.3 in December, a marked downturn after a recent positive trend. For November, the market research institute reports an increase of 2.6 points to -18.4. According to the institute, negative effects in the recent period were mainly driven by a sharp decline in income expectations and weaker willingness to purchase. The HDE Consumer Barometer showed a slightly positive trend, having risen slightly.
The ifo business climate for the retail sector (including vehicles) increased slightly by +3.1 points to -22.1 in November. The assessment of the current situation improved by 4.3 points to -12.1, while expectations increased by 2 points to -31.7. According to the ifo survey, retail companies are increasingly planning price increases. As a result, price expectations rose for the second consecutive time to 26.4 points.
After the temporary improvement in consumer sentiment in recent months, some leading indicators are now showing a weakening trend again. With growing concerns about job security and ongoing domestic and geopolitical uncertainties, a sustainable recovery in consumer confidence is likely to take place only in the coming year.
Inflation Rate Slightly Increases to 2.2%
The inflation rate (year-on-year increase in the price level) rose to 2.2% in November, after standing at 2.0% in October and 1.6% in September. Compared to the previous month, consumer prices decreased by 0.2%. The increase in the year-on-year rate over the last two months is mainly due to the fading base effect in energy prices and package tours. Energy prices in November continued to fall by 3.7%, but not as sharply as before. The price increase for food has also moderated. Food prices were 1.8% higher than the previous year, with an above-average increase. The core inflation rate (excluding energy and food) rose slightly in November to 3.0%. This was mainly due to the persistently high price pressure in the services sector, which increased by 4.0% year-on-year.
The prices at earlier stages of production are still acting as a dampening factor for the inflation rate: Producer prices decreased by 1.1% in October compared to the previous year, while they rose by 0.2% compared to the previous month. The main reason for this is the continuing decline in energy prices. Import prices increased by 0.6% in October compared to the previous month and were 0.8% lower than the previous year. Wholesale prices increased by 0.4% in October compared to the previous month but were 0.8% lower than in the same month of the previous year.
On the spot markets, natural gas prices remained relatively moderate in recent weeks, although the TTF base load, at around €45/MWh, is now about 25% above the previous year’s level. Compared to the previous month, it remained almost unchanged. Market expectations suggest that natural gas prices will likely remain around €45/MWh in the coming quarters. The price for crude oil (Brent) was recently around €70 per barrel, about 4% higher than the previous month, and 2% higher than the previous year.
Weak Labor Market Development Continues
Economic weakness continues to shape the labor market. In October, employment slightly increased by 0.1% compared to the previous year, but there was a slight decrease of 3,000 people seasonally adjusted compared to September. Social security-contributing employment developed positively in September (+10,000 people), but stagnated over the last few months. At the same time, registered unemployment increased by 7,000 people, and underemployment rose by 2,000 people. The number of short-time work notifications to the Federal Employment Agency (BA), which had increased significantly after the holiday period, remained at an elevated level in November. The sectors most affected include metalworking, mechanical engineering, and car manufacturing. Although short-time work remains well below the peaks of the COVID-19 pandemic, significant increases are expected in the coming months due to the recently rising number of notifications.
Leading indicators suggest further cooling in the labor market: The IAB Labor Market Barometer signals a continued increase in unemployment and a dampened development in employment. The hiring intentions of companies, according to the ifo Employment Barometer, are also weakening again. Unlike before, this trend is now also visible in the services sector. The decreasing demand for labor is also reflected in a renewed decline in job vacancies reported to the Federal Employment Agency, which are at historically low levels in November. Given the recent media announcements about job cuts in the manufacturing sector, a continuation of the weak labor market development is expected in the near future.
Preliminary Indicator for Corporate Insolvencies Declines in November
The IWH Insolvency Trend shows 1,345 insolvencies of corporations and limited companies in November, a decrease as previously forecasted by IWH. Compared to the previous month of October, which marked a yearly peak, insolvencies dropped by 12.1%, but were 37.7% higher than the same month last year. The number of affected jobs was slightly higher than in October, with around 11,400 compared to 10,700. Based on leading indicators, IWH expects a similar number of insolvencies for the next two months as in November, before numbers could rise again in February.
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