Germany

Germany

The technical recession hovering over Germany at the start of the year has been averted for the time being. This is mainly thanks to the robust recovery of the service industries that had been severely impacted by the Covid restriction measures one year ago. Manufacturing, on the other hand, is still struggling with the consequences of the pandemic. Material and supply bottlenecks intensified in the summer months and it is still unclear whether and when this situation will ease. The war in Ukraine is likely to further prolong Germany’s supply chain problems.

German foreign trade has suffered considerably from supply bottlenecks. This was the main reason why net exports failed to contribute to economic growth in the first quarter. The lockdowns in China, though lifted now, were still having a tangible effect on foreign trade over the summer. The increased uncertainty caused by the outbreak of the war in Ukraine is additionally weighing down trade. Due to the weak results of the first six months of the year, the growth in export of goods and services for 2022 as a whole is unlikely to be more than 2.5 percent in real terms. Lower exports will also reduce the import of intermediates. However, the sharp increase in prices for fuel and non-fuel commodities has considerably worsened the terms of trade and is pushing up import bills steeply. With travel picking up again, the import of services also increased robustly this year. All in all, imports are set to rise by 6.5 percent following price adjustment, thereby far outperforming exports.

The lifting of restrictions to stem the pandemic boosted private consumption at the beginning of the year. High-contact services benefited particularly in the first quarter. Rising employment, the support packages to compensate the higher energy prices, and the pension adjustment that came into effect in the middle of the year all served to stabilise private consumer demand. Even if only a quarter of the surplus savings from the pandemic flow into consumption expenditure this would translate into growth of more than two percentage points in private consumption alone. Despite the current high price increases that will burden consumption in real terms, private consumption expenditure is on track to grow by 3.5 percent this year. Public consumption expenditure is also set to increase again this year due to spending to support refugees from Ukraine and on the federal government’s aid measures to compensate citizens for burdens related to the war. We expect growth here of around 2.5 percent.

In spite of the high investments needed for the digital and energy transition, growth in investment this year is likely to be restrained. The biggest factor curbing investment is the heightened uncertainty surrounding the war in Ukraine. In view of the current material bottlenecks, additional investment will not be able to help expand production. The contribution to growth from investment in plant and equipment is therefore just 0.5 percent. In construction investment we expect to see a drop of 1.5 percent this year, with growth increasingly hampered by the severe shortage of materials. Although the planned residential construction projects should not yet be affected by the rise in interest rates this year, price increases are weighing down investment in public construction and the higher value of authorised commercial construction is only due to the increase in prices and is actually negative in real terms. Investment in other assets (software, research and development) has already increased by one percent since the beginning of the year. It should continue to recover in the further course of the year and reach growth of two percent compared to last year. All in all, gross domestic product this year is set to rise by just over one percent year on year in real terms.