Quarterly Report Germany III/2022: Economic recovery falters

Economic recovery falters

German industry heading for recession

QIII-2022

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The economic recovery is faltering. The impact of the war on the economy is becoming increasingly evident. The BDI now expects GDP to grow by only 0.9 percent this year following price adjustment.

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Industry is heading for a deep recession in the next few months that will radiate across the whole economy. The only way to avoid severe disruptions to the economy is a rapid agreement at European level for immediate measures on the electricity and gas market with swift implementation in the member states, and an expansion of support programmes for enterprises.

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Private consumption was dominated by high demand for services in the first six months of the year. Steeply climbing prices are increasingly squeezing the disposable income of private households, jeopardising growth.

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The sharp price increases for fossil fuels and weak euro have substantially worsened the terms of trade. With exports onlyexpected to rise marginally, net exports are set to pull GDP growth down by 1.4 percentage points this year.

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Industrial production is still struggling with a shortage of inputs. Although shortages and problems in the procurement of inputs and raw materials have eased somewhat, the war in Ukraine has increased uncertainty and the rapidly rising energy prices are an additional weight on production.

German economy

Tiny growth in second quarter

Contrary to the preliminary figures published by the German Federal Statistical Office, Germany’s economic output rose minimally in the second quarter 2022. Real gross domestic product (GDP) increased 0.1 percent over the previous quarter following seasonal and calendar adjustment, and also regained its pre pandemic level recorded in the fourth quarter 2019. In the first quarter 2022, the German economy had expanded by 0.8 percent.

Compared to the first quarter of the previous year, GDP was 1.7 percent higher following price and calendar adjustment. Compared to the economic growth within the European Union of four percent, Germany’s performance was well below average. GDP growth in the spring quarter was also much higher in the other major EU member states. Spain’s economy posted second quarter growth of 6.3 percent, Italy 4.6 percent and France 4.2 percent. Compared to the fourth quarter 2019, the quarter before the outbreak of the pandemic, only Spain’s GDP was lower than its pre pandemic level. In both France and Italy, GDP was one percent higher, while GDP in the EU was two percent higher.

In the second quarter 2022, the country’s economic output was generated by a workforce of 45.5 million employees working in Germany. That is 664,000 more than one year ago. Furthermore, there are now more people in employment than before the outbreak of the Covid pandemic in spring 2020. The labour volume measured in hours increased by one percent to 14.5 billion in the second quarter 2022 year on year but was 1.3 percent lower than in the fourth quarter 2019 following seasonal adjustment.

A look at the income side of GDP clearly shows that the service sector accounted for all growth in the second quarter. Gross value added among other service providers (which also includes art and culture) recorded the strongest growth, rising 7.3 percent year on year, followed by retail, transport and hospitality, which was up 5.9 percent. Despite the meaty increases in gross value added, it was these service industries that have not yet regained their pre pandemic level. Financial and insurance service providers and the information and communications sector increased gross value added by four and 4.8 percent respectively. Corporate service providers expanded value added by 3.8 percent, public service providers by a slim 1.5 percent and real estate by a meagre one percent. In the construction industry, value added dropped by a substantial 3.9 percent in the second quarter. Manufacturing, meanwhile, recorded a dip of 0.6 percent in value added. Overall, gross value added grew by two percent in the second quarter year on year.

On the expenditure side of GDP, private consumption expenditure increased by a total of 7.2 percent year on year in the second quarter 2022 following price adjustment. Following the easing of restrictions imposed to stem the pandemic, spending on hotels and restaurants almost doubled compared to one year previously (up 86.2 percent). Consumers also spent over one fifth more on leisure, entertainment and culture (up 23.8 percent), and considerably more on clothing and shoes (up 20.5 percent). With these robust increases, expenditure in these segments exceeded their 2019 levels for the first time. Modest rises in spending were recorded in home furnishings and household goods (up 0.8 percent) and transport and communications (up 0.5 percent). At the same time, spending was down on housing, energy and water (down 1.3 percent) and food, beverages and tobacco (down four percent). In the same period, state consumption expenditure grew by a much lower 1.9 percent. All in all, consumption expenditure in the spring quarter was 5.5 percent up on the same quarter last year.

After a positive start to the year, gross fixed capital formation turned down 1.6 percent in the second quarter 2022 year on year following price adjustment. This decrease was propelled by a 3.9 percent drop in construction investment across all segments in the spring quarter following the mild winter. Investment in other assets (patents, licences) was 1.8 percent higher than in the previous year. Following minimal growth at the start of the year, investment in plant and equipment recorded another upwards nudge in the second quarter, this time by 0.6 percent.

Exports of goods and services increased by 1.9 percent in the second quarter 2022 following price adjustment. While goods exports more or less stagnated, going up by a bare 0.6 percent year on year, services exports grew by a robust eight percent. Regarding imports, imports of goods increased by 2.1 percent while the import of services, particularly travel abroad, shot up 28.1 percent. All in all, imports expanded 7.2 percent. As imports outperformed exports, net exports pulled GDP growth down by 2.1 percentage points in the second quarter.

Foreign trade

Exports to the United States rise rapidly, while most imports came from China

In the second quarter 2022, German exports increased by 51.7 billion euros or 15.2 percent year on year to reach 391.8 billion euros, according to figures from the German Federal Statistical Office (country specific seasonally adjusted data is not available). The strongest growth in absolute figures was in trade with the United States. Exports to this country increased by 10.2 billion euros, just under 35 percent. As in the first quarter, the United States was the most popular destination of exports.

In trade with its EU partner countries, above average growth was recorded in exports to Austria (up 23.9 percent), Italy (up 19.1 percent) and Poland (up 18.2 percent). Going the other way, exports to

the United Arabic Emirates decreased by 279 million euros or 14.6 percent. German exports to Russia more than halved in the second quarter (down 53.7 percent) due to sanctions.

German exports and imports in Q2 2022 in selected countries Year on year change

increase (+) or decrease ( ) in exports

increase (+) or decrease ( ) in imports in million euros in % in million euros in %

USA 39 659 + 10 248 + 34 8 China 50 161 + 17 767 + 54 8

Austria 22 097 + 4 261 + 23 9 Norway 12 792 + 9 541 + 293 5

Netherlands 27 782 + 3 727 + 15 5 Netherlands 31 429 + 6 653 + 26 9

Italy 22 395 + 3 584 + 19 1 USA 22 924 + 4 128 + 22 0

Poland 22 680 + 3 499 + 18 2 Austria 14 884 + 3 192 + 27 3

France 29 207 + 3 326 + 12 8 Czech Republic 15 477 + 2 945 + 23 5

Switzerland 17 317 + 2 687 + 18 4 France 18 043 + 2 871 + 18 9

Great Britain 18 149 + 2 268 + 14 3 Russia 10 486 + 2 857 + 37 5

Czech Republic 13 823 + 1 861 + 15 6 Poland 19 177 + 2 384 + 14 2

Belgium 14 357 + 1 613 + 12 7 Italy 18 817 + 2 287 + 13 8

Turkey 6 566 + 1 240 + 23 3 Turkey 6 169 + 1 802 + 41 3

India 3 887 + 1 097 + 39 3 Singapore 2 645 + 1 619 + 157 8

Spain 12 316 + 1 009 + 8 9 Belgium 15 418 + 1 602 + 11 6

Denmark 6 000 + 991 + 19 8 Switzerland 14 040 + 1 440 + 11 4 Taiwan 4 150 + 1 208 + 41 0

U A. Emirates 1 628 279 14 6 Great Britain 9 679 + 1 150 + 13 5

Russia 3 090 3 581 53 7 Australia 1 921 + 1 123 + 140 7

Total 391 794 + 51 686 + 15.2 Total 380 695 + 84 205 + 28.4

Sources: Federal Statistical Office, own calculations

German imports of goods expanded almost twice as much as exports year on year, going up by 28.4 percent. The strongest growth in absolute terms was in trade with China (up 17.7 billion euros or 54.8 percent). On account of the high prices for fossil fuels, imports from oil and gas supplier countries exhibited particularly strong growth. The import of goods from Norway almost quadrupled in nominal

terms (up 9.54 billion euros or 293 percent), while imports from Australia more than doubled (up 141 percent). Imports from Russia grew by 2.86 billion euros or 37.5 percent. Above average growth was also recorded in imports from third countries including Turkey (up 41.3 percent), Taiwan (up 41.0 percent) and Singapore (up 158 percent).

In July 2022, exports increased by 14.3 percent compared to the same month the previous year. The latest figures for imports show a rise almost twice that of 29.3 percent. In the first seven months of the current year, exports increased by 13.4 percent compared to the same period last year. In that time, exports to EU countries increased by 14.4 percent, slightly outpacing exports to third countries (up 12.2 percent), while exports to the Russian Federation dropped by 35.6 percent. German imports increased by a total of 26.7 percent in the first seven months of the current year. Imports of goods and services from EU states rose by 17.1 percent compared to the same period last year, while imports from third countries raced ahead (up 37.9 percent). Imports from Russia were up by as much as 46.7 percent as of July on account of the steep increases in fossil fuel prices.

Labour market remains stable

According to preliminary data from the German Federal Statistical Office, the number of people in employment rose by 23,000 in July 2022 following seasonal adjustment. Compared to July 2021, the number of people in employment increased by 1.3 percent to 45.6 million. Employment subject to social security contributions also continued its upward path. According to the projections of the Federal Employment Agency, a total of 34.44 million people (most recent figure available) were in employment subject to social security contributions in June 2022. That is 639,000 people or 1.9 percent more one year ago. The number of workers in full time employment subject to social security contributions increased by 307,000 or 1.3 percent year on year. The number of workers in part time employment subject to social security contributions rose by 331,000 or 3.3 percent.

Other forms of employment contracted slightly compared to the previous year. The number of self employed people including contributing family members recorded dropped by 59,000 or 1.5 percent down to 3.9 million. The number of people exclusively in marginal employment was at 4.16 million in June, according to preliminary figures from the Federal Employment Agency, much the same as one year previously (up 10,000 or 0.2 percent). The number of unemployed people decreased by a slim 31.100 or 1.2 percent down to 2.5 million. Following seasonal adjustment, the number of unemployed persons increased slightly by 28,000. This increase is not a result of problems on the labour market but a reflection of the inclusion of Ukrainian refugees that started receiving social security at the beginning of June. The unemployment rate in August this year was at 5.5 percent as calculated by the Federal Employment Agency or 3.4 percent according to the ILO definition.

Incoming orders for industry cloud over further

According to preliminary figures, incoming orders for German industry were down by 1.1 percent in July 2022 compared to the previous month following price, calendar and seasonal adjustment. Including large orders, the order volume dropped by 0.8 percent in July. The figures for June 2022 were upwardly revised to minus 0.3 percent. Compared to July last year, new orders were down by as much as 13.6 percent. Demand from at home dropped by 2.5 percent in July compared to June on account of the strong performance that month. Demand from abroad rose eight percent on the back of increased orders from third countries, which grew by around one sixth. At the same time, orders from the euro area were 4.1 percent down on June.

Factoring in the revised figures for June, incoming orders in the second quarter 2022 were 5.6 percent lower than in the previous quarter following calendar and seasonal adjustment. For the first time in six quarters, incoming orders were also negative year on year. Compared to the pre pandemic level (fourth quarter 2019), the volume of new orders was still 4.1 percent higher. Looking at the origin of new orders in the second quarter, domestic orders dropped by 1.1 percent compared to the previous quarter. Orders from abroad declined by a hefty 8.5 percent. While demand from the euro area slimmed down by 2.2 percent, orders from third countries took a tumble of 12.2 percent.

Among the main groups of industrial goods, demand for intermediates registered its fourth consecutive quarter on quarter drop in the second quarter 2022 (down 3.5 percent). Demand from at home and abroad dropped in equal measure. Despite the weak momentum in demand, new orders were still 6.9 percent higher than before the pandemic (fourth quarter 2019).

Capital goods producers received 8.3 percent fewer new orders than in the first quarter 2022. Orders from abroad were particularly low, at minus 12.1 percent. Domestic demand for capital goods lost a marginal 0.8 percent over the same period. Compared to the pre pandemic level, new orders were 2.8 percent higher at last count.

New orders for consumer goods producers grew 5.3 percent in the second quarter 2022. Domestic orders rose by a solid 8.1 percent, clearly outpacing foreign orders (up 3.5 percent). Incoming orders for this industrial group were 19.6 percent higher than before the pandemic. What’s more, the latest reading on the incoming order index showed a record all time high for the second time in a row.

At the start of the third quarter 2022, ifo Institute figures on the reach of orders in hand showed a slight drop down to 4.4 production months after rising to a record high of 4.5 production months in April. Among the main industrial groups, orders in hand among consumption goods producers contracted to

2.1 production months. The order backlog for producers of intermediates decreased to 3.6 production months. The manufacturers of capital goods needed 6.1 months to work off their order backlog. This figure has only ever been higher in the first half of this year at 6.4 production months.

According to figures from the German Federal Statistical Office, orders in hand for manufacturing after calendar and seasonal adjustment were 0.5 percent higher in June 2022 than in the previous month and 14.1 percent higher than one year ago. This is a new record high since the data series began in January 2015. While the backlog of orders from at home increased by two percent compared to the previous month, orders from abroad dropped down by a minimal 0.3 percent.

New orders, manufacturing

5.6 1.4 -35 -25 -15 -5 5 15 25 35 45 55 65 75

2019 2020 2021 2022

Change over previous year, two-month-average, in percent (right axis)

Volume index in manufacturing, two-month-average, seasonally adjusted (left axis)

Change over previous quarter (q-o-q), in percent

Source: Federal Statistical Office

Industrial production: supply bottlenecks stall upturn

Industrial production (manufacturing excluding energy and construction) decreased by one percent in July 2022 compared to the previous month following seasonal and calendar adjustment. Production was also down year on year (down 1.4 percent). Compared to February 2020, the last month before the outbreak of the pandemic, seasonal and calendar adjusted production was down by 6.6 percent. Energy production continued climbing in July, going up by 2.8 percent. Activity in the construction sector was also up on the previous month, rising 1.4 percent. Despite these gains, the weak performance in the production sector resulted in a slim overall drop in output of 0.3 percent.

Despite the upward revision of the June figures, industrial production in the second quarter 2022 was 0.7 percent lower than in the first quarter after seasonal and calendar adjustment. This follows on from a dip of 0.2 percent in the first quarter. Year on year, production decreased by 1.1 percent. Energy production dropped by 0.3 percent quarter on quarter following seasonal and calendar adjustment. Year on year, energy production was nonetheless 0.5 percent higher. Following a strong first quarter on account of the mild weather, construction activity decreased by 3.3 percent

following seasonal and calendar adjustment. Year on year, construction activity was down by 2.8 percent in the second quarter 2022.

year on year change in percent

original value calendar adjusted

compared to previous period in percent

2022

Q1 Q2 Mai Jun Jul seasonally and calendar adjusted

Production

Industry

Intermediat

Capital

Consumer

Energy

Construction

Finishing

Among the main industrial groups, producers of intermediates recorded the biggest quarter on quarter drop in production following seasonal and calendar adjustment, decreasing 1.4 percent. Year on year, the drop in production here was 3.4 percent. Capital goods production contracted by 0.3 percent quarter on quarter, following a drop of 1.9 percent in the first quarter of the year. Year on year, capital goods production recorded its fourth consecutive drop, this time to the scale of one percent. Consumer goods producers cut their production marginally, going down by 0.3 percent compared to the previous quarter. Year on year, production was up by 3.1 percent, its fifth consecutive rise.

The shortage of inputs is still hampering industrial production. While the ifo Institute has reported a slight easing of shortages and problems in the procurement of inputs and raw materials, the war in Ukraine has increased uncertainty and the steeply rising energy prices are also weighing on production. As of July, industrial production stagnated at the same level as in the previous quarter. The latest sentiment indicators point

receding production in the next few months. Furthermore, industrial production was also ruffled by problems

inland shipping during July and August caused by low water levels.

manufacturing

Change over previous year, two-month-comparison, in percent (right axis)

Volume index in manufacturing, two-month-average, seasonally adjusted (left axis)

Change over previous quarter (q-o-q),

Capacity utilisation remains high

percent

Production capacity utilisation in manufacturing remained unchanged at the start of the third quarter. The ifo Institute figures recorded an industrial capacity utilisation of 85.4 percent, the same as at the start of summer. Capacity utilisation was thus 1.3 percentage points higher than the ten year average and also higher than before the outbreak of the pandemic. Capacity utilisation in manufacturing excluding food rose marginally over the same period, going up to 85.8 percent, also 1.3 percentage points over the long term average.

Among the individual industries, textiles and pharmaceuticals both recorded a higher capacity utilisation rate at the start of the third quarter than in April, with an increase of 1.8 and 1.7 percentage points respectively. Capacity utilisation in both industries was still below the average over the last ten years. The producers of data processing equipment and metal products increased their capacity utilisation both compared to April and compared to their long term average. Machinery manufacturing also registered a rise in capacity utilisation and a higher rate than the long term average. In chemicals, the capacity utilisation of facilities increased to 81.5 percent, which is still 1.9 percentage points below the industry’s long term average. In vehicle production, the capacity utilisation of facilities has picked up slightly according to the latest figures but, at 82.9 percent, was still a good 3.2 percentage points below the long term average. Compared to the start of the spring quarter, capacity utilisation was down among producers of electrical equipment (down 0.3 percentage points), furniture (down one percentage point) and food, beverages and tobacco (down 1.1 percentage point), but still well above the respective long term average in all three cases.

Strong growth in sales inflated by rising prices

In the second quarter of the year, sales in the manufacturing sector increased by 16.5 percent, following a rise of 13.8 percent in the first quarter. This corresponds to a year on year increase of 15.2 percent in the first six months of 2022. Among the individual industries, sales expanded the most in energy intensive industries. The paper industry recorded a surge in sales of 30.9 percent. Sales in chemicals (up 23.3 percent) and metal production and metalworking enterprises (up 22.9 percent) were up by more than one fifth. Above average increases in sales were also registered by the printing industry and food, beverages and tobacco. Double digit growth in sales was also recorded by textiles and clothing, pharmaceuticals, and electrics and electronics (up 11.2 percent). Vehicle production (up 4.4 percent) and machinery manufacturing (up 7.4 percent) both recorded below-average increases in sales, according to German Federal Statistical Office figures

The strong uptrend in sales should not obscure the fact that industrial sales are still lower than before the outbreak of the pandemic in real terms. In the second quarter 2022, price adjusted sales in manufacturing even dropped a slim 0.6 percent quarter on quarter. Year on year, price adjusted sales were still up by 0.7 percent. The origin of sales shows a split picture. While domestic sales stagnated year on year, sales from abroad increased by 1.6 percent. Sales from the EU and third countries displayed similar momentum. Compared to the fourth quarter 2019, the last quarter before the outbreak of the pandemic, sales were down by 2.8 percent. Domestic sales were down by 3.3 percent while foreign sales decreased by 2.4 percent. Sales generated within the euro area were 5.6 percent lower than before the outbreak of the pandemic. Trade with third countries came close to regaining the pre pandemic level (0.1 percent lower).

Business sentiment at two-year low

tumble

slight

with current business. At the same time, prospects for the upcoming months remained gloomy. Among the individual sectors, the business climate among service providers improved slightly following a slump in the previous month. Service providers rated their current business as somewhat improved. Prospects for the next six months remained pessimistic. Sentiment among wholesalers and retailers continued to plummet. An ever smaller number of businesses are satisfied with their current situation. At the same time, prospects for the coming six months deteriorated dramatically. High inflation rates are weighing heavily on business. In mainstream construction, sentiment improved somewhat. Most construction companies are still pleased with current business. Prospects for the next six months also brightened moderately. In the manufacturing sector, the overall situation has not changed. Companies were slightly less positive about current business but also a little less pessimistic about their prospects. The ifo index for manufacturing is still indicating a downturn. The export prospects of industry deteriorated for the third consecutive time and have been rated as negative by most companies for the last two months. According to ifo Institute figures, supply shortages in industry have nonetheless eased somewhat with the proportion of companies still reporting problems down to 62 percent (July: 73 percent), the lowest figure in the last year or so.

Downswing

pandemic.

still boosted by catch up demand in the wake of the pandemic, the last time the low base effect will make the figures look good. The economic impact of the war in Ukraine is becoming increasingly apparent. At the beginning of the Russian invasion, hopes were that the economic impact of the dispute would remain limited but disruptions on the international raw materials and energy markets have become very tangible indeed. The war may well have a bigger impact on the German economy than the continuing Covid pandemic or the global economic and financial crisis of 2008/2009. The manufacturing sector is particularly hard hit by the soaring energy prices and will slide into recession in the next few months. The severity of the downturn will depend on the further course of the war in Ukraine, the economic policy approach taken by the EU regarding energy markets and the effectiveness of support programmes for enterprises.

What effect have the dramatic changes in the parameters caused by the war had on the growth prospects for the German economy? Private consumption expenditure increased by more than six percent in the first six months of the year 2022 compared to the same period last year, far surpassing our expectations. In the second half of the year, private consumption is likely to lose steam on account of inflation reducing disposable incomes. According to figures from consumer research institute GfK, consumer sentiment dropped to a new all time low in August. The risk of recession from the consumer perspective is extremely high. The propensity to save has increased substantially over the same time, prompted by fears of rising energy costs and looming back payments. Rising prices for energy and food are also reducing the funds available for additional purchases, causing consumers’ spending propensity to crumble. We expect to see a considerable decline in private consumer spending in the second half of the year. On account of the strong increase in consumption spending in the first half of the year, we still believe that the annual growth rate of 3.5 percent forecast by us is within reach. In the case of public consumption expenditure, however, we do need to revise our forecast based on the course of the year so far. We now expect an increase this year of around 2.5 percent in real terms. All in all, consumption expenditure is set to increase by 3.2 percent in 2022 overall.

The national accounts show a slight increase in investment in plant and equipment in the first six months of the year, but it was still below the pre pandemic level. We presume that supply shortages have delayed catch up investment in plant and equipment in the wake of the Covid crisis. Another indicator confirming this is the high order backlog waiting to be processed by capital goods producers which should have a stabilising effect on investment activity. We therefore expect investment in plant and equipment to trend sideways in the further course of the year and stick to our annual growth forecast of 0.5 percent. Construction investment decreased by around one percent in the first half of the year despite a strong first-quarter performance. The terms of financing have deteriorated in the meantime which is likely to affect construction demand further down the line. Falling real incomes, uncertainty about future energy prices and economic prospects will all be curbing demand in the medium term, particularly in residential construction. Further negatives are the recent massive increases in construction costs and a shortage of skilled construction staff. In contrast to our forecast so far, we now believe that construction investment will not stagnate this year overall but contract by 1.5 percent in real terms. We still expect investment in other assets (software, research and development) to increase by two percent. Overall, this would result in a slight decrease in gross fixed capital formation of 0.2 percent this year compared to last year.

In the first six months of the year, exports increased by around two percent but are likely to display only subdued growth in the further course of the year. Supply shortages are starting to ease slightly which means that companies can gradually work off their order backlog. Much momentum is not likely

in view of the recent decline in export prospects, but neither is a drastic downturn. We are therefore sticking to our growth forecast for exports of 2.5 percent. The sharp increases in prices for energy and non energy raw materials and the weak euro have considerably deteriorated the terms of trade. Furthermore, the rapid pick up in travel precipitated a robust increase in imported services in the first six months of the year and this trend is likely to continue into the third quarter. For this reason, we need to upwardly revise our expectations considerably for the development of imports. According to ifw (Kiel Institute for the World Economy) estimates, fossil fuel energy imports alone will come in at 123 billion euros higher this year. Based on the data available for the year so far, we now expect imports this year to increase by 6.5 percent following price adjustment. In view of the considerably weaker trend in exports, net exports are likely to result in a negative contribution to GDP of 1.4 percentage points. On account of the pronounced minus anticipated from net exports, we have halved our growth forecast for gross domestic product this year compared to our forecast in June. We now only expect GDP to grow by 0.9 percent in real terms compared to the previous year.

Imprint

Bundesverband der Deutschen Industrie e.V. (BDI) Breite Straße 29 10178 Berlin

T: +49 30 2028 0 www.bdi.eu

German Lobbyregister Number R000534

Author Thomas Hüne

T: +49 30 2028 1592 t.huene@bdi.eu

Editorial / Graphics

Dr. Klaus Günter Deutsch

T: +49 30 2028 1591 k.deutsch@bdi.eu

Marta Gancarek

T: +49 30 2028 1588 m.gancarek@bdi.eu

This report is a translation based on „Quartalsbericht Deutschland III / 2022“, as of 19 September 2022.

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