Economic recovery delayed
Stagnation on the cards this year
▪ German economy struggling to shake off winter depression. Real economic output is likely to stagnate this year overall, with the economy only slowly picking up pace.
▪ Private consumption turning into Achilles’ heel of German economy. High inflation and diminishing real wages are weighing down consumption.
▪ Foreign trade propping up growth. We expect exports of goods and services to expand by two percent. Imports are set to tread water in real terms with energy and commodities prices decreasing
▪ Investment in plant and equipment should rise by around three percent as delayed investments are made. The central bank’s monetary policy and high material costs are stifling construction activity.
German economy
Technical recession over winter months
In the first quarter 2023, Germany’s gross domestic product was 0.3 percent lower than in the fourth quarter 2022 following price, calendar and seasonal adjustment. Economic output was thus considerably lower than the stagnation indicated in the preliminary estimate (published 28 April 2023). GDP growth had already been negative in the fourth quarter 2022 compared to the previous quarter (down 0.5 percent). With two successive quarters of negative growth, the German economy was therefore in a technical recession over the winter months 2022/2023. Economic output also decreased year on year, down 0.5 percent following price and calendar adjustment.
In contrast to Germany, the economic output of the major EU member states expanded in the first quarter 2023 quarter on quarter. Spain’s economy grew by 0.5 percent, the Italian economy 0.5 percent, and France 0.2 percent at the start of the year. In the European Union overall, economic output nudged up 0.1 percent. In the euro area, on the other hand, economic activity slipped down 0.1 percent, joining Germany in a recession over the winter months.
On the income side of GDP, the country’s economic output was generated by a workforce of around 45.6 million employees in the first quarter 2023. That is 446,000 people or one percent more than one year ago. The labour volume measured in hours increased by 0.9 percent year on year. The average number of hours worked per employee remained steady (down 0.1 percent).
Gross value added, surprisingly, rose 0.7 percent in the first quarter 2023 while GDP decreased 0.5 percent. Large disparities in the development of GDP and gross value added are relatively unusual. In the first quarter of the year, the manufacturing sector and information and communication recorded the strongest growth in output, expanding their activities by 3.2 percent and 2.8 percent respectively. Above-average growth was also posted by public service providers (up 1.8 percent), property services (up 1.1 percent) and other service providers (up 1.5 percent). While gross value added more or less stagnated among corporate service providers, it turned down in retail, transport and hospitality and in financial and insurance services. Construction experienced the strongest drop in gross value added, with a fall of 0.7 percent.
On the expenditure side of GDP, consumption proved to be a major curb on growth. In the first quarter 2023, private consumption expenditure was down 1.4 percent year on year following price adjustment. Consumers reduced their spending the most on food, tobacco and beverages and household furnishings and household goods, with cuts of more than seven percent in both cases. Expenditure on housing, water, electricity and heating, and transport and communication only dropped marginally. Spending on hotels and restaurants (up 14 percent) and clothing and shoes (up two percent) increased substantially
After decreasing in the fourth quarter 2022, gross fixed capital formation increased by a slim 0.8 percent in the first quarter 2023 year on year following price adjustment. Investment in plant and equipment increased the most, rising a solid 6.7 percent year on year. Investment in other assets (incl. patents and licences) was also up, rising 2.6 percent. Construction investment went the other way, dropping 2.9 percent. Investment in residential housing decreased the most, going down 3.6 percent. The decline in investment in non-residential construction was only half as pronounced, at 1.8 percent. All in all, gross fixed capital formation still contributed 0.2 percentage points to GDP growth.
Exports of goods and services increased by 1.8 percent following price adjustment in the first quarter 2023. Goods exports rose 2.1 percent year on year while the export of services tread water, nudging up by a mere 0.3 percent. Imports followed a similar upward trend in the same period, rising 1.7 percent. While the import of goods contracted by 1.3 percent, imported services surged up 11.9 percent. As exports expanded somewhat more than imports, net exports made a positive contribution to GDP growth of 0.1 percentage points.
Foreign trade by country
In the first quarter 2023, the export of goods increased by 28.5 billion euros or 7.6 percent year on year (country-specific seasonally adjusted data is not available). The strongest growth in the first quarter was in trade with the United States (up 4.89 billion euros or 14.1 percent). Exports to France also showed above-average growth (up 2.51 billion euros or 8.9 percent), as did exports to the Netherlands (up 2.48 billion euros or 9.2 percent) and to Italy (up 2.15 billion euros or 10.1 percent). Trade with the United Kingdom also continued its upward trend, rising 1.96 billion euros or 10.9 percent). Exports to Turkey, India, Mexico and Brazil increased by a total of just over five billion euros, slightly topping the increase in exports to the United States. Exports to Russia nearly halved (down 2.46 billion euros or 47.1 percent). The drop in exports to China was even higher in absolute terms (down 3.29 billion euros or twelve percent).
German imports increased by a total of 5.69 billion euros or 1.6 percent year on year in the first quarter 2023. The strongest rise in nominal terms was in imports from the United States (up 4.64 billion euros or 23.4 percent). Above-average growth was also posted in imports from eastern EU member states Poland (up 3.11 billion euros or 17.4 percent), the Czech Republic (up 2.21 billion euros or 16.5 percent), Hungary (up 1.45 billion euros or 18.2 percent) and Romania (up 713 million or
17.3 percent). Imports from the United Arab Emirates multiplied almost fivefold year on year on account of the diversification of gas supplies. At the same time, sanctions against the Russian Federation decimated imports from this country to almost zero, with a decrease of 10.5 billion euros or 86.3 percent. Imports were also down from the gas supplying countries Norway (down 16.7 percent), the Netherlands (down 6.5 percent) and Belgium (down four percent). Imports from China were also much lower than in the same period last year, down 4.35 billion euros or 9.7 percent.
German exports and imports in Q1 2023 in selected countries
Labour market: employment remains upward in spring
The labour market continued to gather steam at the start of spring. According to preliminary data from the German Federal Statistical Office, the number of people in employment rose by 18,000 in April 2023 after seasonal adjustment, following an increase of 56,000 in March and 57,000 in February. Compared to April 2022, the number of people in employment was up by 421,000 or 0.9 percent to 45.80 million. This was nonetheless 180,000 less than the peak level recorded in November 2022.
The latest employment figures reveal further upward movement in employment subject to social security contributions. According to projections by the Federal Employment Agency, a total of 34.75 million people were in employment subject to social security contributions in March 2023 (most recent figure available), which is more than ever before. Seasonally adjusted, that is 13,000 people more than in February and 315,800 more people than one year ago. In March, the number of workers in full-time employment subject to social security contributions was 135,000 or 0.6 percent higher than one year ago, and the number of workers in part-time employment subject to social security contributions 185,000 or 3.5 percent higher.
The latest figures on other forms of employment display divergent trends. The number of selfemployed people including contributing family members dropped by 5,000 in the first quarter 2023 compared to the previous quarter following seasonal adjustment. Year on year, the number of selfemployed people was down by 32,000 or 0.8 percent to 3.89 million. The number of people exclusively in marginal employment also decreased, according to preliminary figures from the Federal Employment Agency, dropping 2,000 after an increase of 7,000 in February. At 4.16 million, that was still 96,000 more than one year ago. The number of unemployed people increased by 284,100 or 12.6 percent to 2.54 million in May (year on year). Following seasonal adjustment, the number of unemployed people increased by 9,000 in May, after an increase of 23,000 in April. The
Agency or
percent according to the ILO definition.
Have incoming orders bottomed out?
After sliding steadily throughout 2022, incoming orders recorded a pronounced turnaround in the first two months of the new year. The trend turned downward again in March, with new orders decreasing by 10.7 percent following seasonal and calendar adjustment, the biggest drop recorded in incoming orders since the Covid-induced slump in April 2020. In the first quarter 2023 overall, the order intake stagnated, moving 0.0 percent. Year on year, incoming orders were down by a hefty 9.7 percent.
Regarding the origin of new orders, domestic demand was 1.9 percent lower in the first quarter 2023 than in the fourth quarter 2022. Year on year, demand from within Germany was down by 8.6 percent. Foreign orders were 10.5 percent down in the first quarter compared to the first quarter last year. Quarter on quarter, foreign orders were up by a slim 1.6 percent. Demand from third countries, up 1.9 percent, was considerably stronger than demand from within the euro area (up 1.1 percent).
Among the main groups of industrial goods, the downtrend in demand for intermediates which set in in the middle of last year continued into the new year with orders dropping 4.7 percent in the first quarter 2023 quarter on quarter following calendar and seasonal adjustment. This was the eighth downward quarter in a row. Year on year, orders were down by as much as 10.9 percent. Demand from abroad contracted more, going down 12.3 percent year on year compared to a drop in domestic demand of 9.4 percent.
New orders, manufacturing
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
After a weak performance last year, demand for capital goods was up by a robust 3.9 percent in the first quarter 2023 compared to the previous quarter. Orders were still 8.8 percent down year on year, with the drop in foreign orders, at 9.8 percent, slightly higher than in domestic orders (down seven percent).
Consumption goods producers received 4.6 percent less orders in the first quarter 2023 compared to the previous quarter and following seasonal and calendar adjustment. Year on year, the drop in demand was eleven percent. This was the biggest drop registered since 2009. The plunge in orders from at home was considerably larger, at 15.1 percent, than in orders from abroad, which went down 8.3 percent.
The latest figures show the downward trend continuing apace. In April 2023, the order intake of German industry was 0.4 percent lower than in March following price, calendar and seasonal adjustment and according to preliminary calculations. At the same time, after a revision of the March figures, incoming orders were down by a slightly higher 10.9 percent quarter on quarter. Excluding large orders, incoming orders were nonetheless up 1.4 percent.
Industrial order backlog gradually slimming down
With the order intake slowing down and barriers to production decreasing, companies have been able to slowly work off a proportion of their high order backlogs. According to ifo Institute figures, the reach of orders in hand in manufacturing dropped down to 4.3 production months at the start of the second quarter 2023, marking its second consecutive fall. Compared to the long-term average, the order books are still nicely full. Among the producers of intermediates, the order backlog was at 3.5 production months according to the latest figures. Capital goods producers would still need more than six months to fully work off their order backlog. The order backlog of consumption goods producers even recorded a slight increase, up to 2.6 production months.
According to figures from the German Federal Statistical Office, orders in hand for manufacturing after price adjustment decreased by 1.3 percent in March 2023. This was the third largest fall recorded here since the data series began in 2015. Domestic orders in hand declined by 1.2 percent compared to the previous quarter, while foreign orders dropped 1.4 percent. Although order backlogs have decreased substantially, they are still over one quarter higher than before the outbreak of the pandemic in 2020, following seasonal and calendar adjustment.
There has been no visible momentum so far at the start of the second quarter. If orders remain at their April level until the middle of the year, the second quarter would be somewhat more than eight percent down on the same period last year. The order books of industry are still comfortably full and will keep production levels up for the next few months. At the same time, supply bottlenecks are easing up which could also help lift momentum.
Industrial production rises slightly in April
In April 2023, industrial production increased by 0.1 percent compared to the previous month, and a much more substantial 2.6 percent year on year. The energy industry curbed its production by 1.5 percent compared to March. Construction production was two percent higher than in the previous month, thanks to a strong rise in activity in the finishing trades, while mainstream construction production only registered a minimal rise of 0.7 percent. All in all, output in the production sector was up by 0.3 percent compared to the previous month and up by 1.6 percent compared to the same month last year.
Following a revision of the preliminary figures for March, industrial production increased by 1.7 percent in the first quarter 2023 compared to the previous quarter following seasonal and calendar adjustment. Compared to the first quarter 2022, industrial production was 2.1 percent higher, its third consecutive rise.
Among the main industrial groups, producers of intermediates improved on their performance in the previous quarter, increasing output by 1.9 percent, but were nonetheless 4.5 percent down year on year. Capital goods producers benefited from the further easing of supply bottlenecks and material shortages, producing 2.2 percent more than in the previous quarter. Year on year, production was up by an impressive 9.9 percent following seasonal adjustment. Consumption goods production, on the other hand, faltered and came in at 1.8 percent less than in the previous quarter.
Despite falling incoming orders and downward sentiment indicators, industrial production in Germany remains stable. Easing supply bottlenecks and persistently high order backlogs, particularly in the case of capital goods, will be propping up production for some time to come. Based on industry forecasts, we still expect to see industrial production increase by one percent this year.
Industrial capacity utilisation still slightly above average
With bottlenecks along supply chains gradually easing up, capacity utilisation has also increased. In the second quarter 2023, capacity utilisation in the manufacturing sector edged up 0.2 percentage points quarter on quarter, up to 84.5 percent. Capacity utilisation thus remained slightly higher than the average over the past ten years. In the same period, capacity utilisation in manufacturing excluding food rose by all of 0.4 percentage points, climbing to 0.2 percentage points higher than the average over the last ten years.
Looking at the individual industries, the picture was very mixed. Capacity utilisation in vehicle production increased by a robust 3.9 percentage points over the previous period, taking it above the ten-year average for the first time in two years. According to the latest figures, capacity utilisation in machinery manufacturing was 3.8 percentage points above the long-term average, and in data processing equipment and optical products 2.3 percentage points higher. Among producers of electrical equipment, food, tobacco and beverages, and metal products, capacity utilisation approached its ten-year average. Capacity utilisation in the furniture industry, pharmaceuticals and chemicals was lower than on average over the past ten years.
First quarter industrial revenue slightly higher year on year
In the first quarter 2023, sales in the manufacturing sector decreased by 0.9 percent compared to the fourth quarter 2022 following price, seasonal and calendar adjustment. Year on year, sales were nonetheless up by 1.8 percent. Revenue from home and abroad trended divergently. While domestic revenue was one percent down year on year, sales from abroad posted a rise of 4.5 percent. Sales from within the euro area increased by 5.6 percent, from third countries by 3.7 percent.
Among the individual industries, vehicle production registered the strongest nominal rise in sales year on year in the first quarter 2023, growing sales by 20.1 percent. The second-best performer was the electro industry, which increased sales by one sixth. Double-digit revenue growth was also posted by machinery manufacturing (up 13.9 percent) and other transport equipment (up 15.0 percent). Sales in textiles and in non-metallic mineral products grew a little less than average. Metal production and metalworking only recorded slim rises in revenue. Sales in the pharmaceutical industry only dipped slightly, while chemicals and the woodworking industry both reported double-digit falls in revenue
Manufacturing revenue* in Q1 2023
Motor vehicle production
Electronic industry
Food, beverages, tobacco
Other transport equipment production
Machinery manufacturing
Manufacturing
Textiles, fashion, leather
Glass, ceramics, stone, industrial minerals
Metal production and metalworking sector
Print industry
Pharmaceuticals
Paper and pape
Chemical industry
Wood processing
*Change in percent, year on year
Source: Federal Statistical Office
Business sentiment turns down
The ifo business climate index for Germany registered its first drop in six months. Companies surveyed rated their current business as only slightly deteriorated in April but were much less optimistic about their business prospects for the next six months. The majority of companies have been sceptical about upcoming business since March 2022. Among the individual sectors, service providers were already more satisfied with current business again in May but less optimistic about the next six months for the second time in a row, which brought the overall result to a slight negative. Sentiment among retailers and wholesalers was much gloomier. Current business entered negative territory for the first time in five months and more companies were sceptical about upcoming business. Wholesalers, in particular, were more negative. In mainstream construction, the business climate index turned down for the first time in four months. Current business was rated less positively, while prospects remained pessimistic.
The business climate index for manufacturing also deteriorated tangibly. Most industrial companies were less satisfied with both current business and their prospects for the next six months. Export prospects also fell in May, although the majority of export-oriented companies surveyed were still positive about their export prospects for the near future.
Outlook
Six months ago, it looked like Germany was definitely heading into a tight recession. With gas shortages looming and knock-on disruptions in industrial production a possibility, runaway energy costs for private households and the Covid pandemic still not yet quite behind us, it is not surprising that sentiment was low last autumn. In September and October, the ifo business climate index reached its lowest point since the outbreak of the Covid pandemic. Consumer sentiment indicators such as the consumer barometer of the German Retail Federation HDE and the consumer climate index published by the German consumer research company (GfK) plunged to record lows in October. The question then was not if but how deep Germany would slide into a recession. Forecasting negative growth in GDP of 0.3 percent, the BDI was among the most optimistic forecasters at the start of the year. Things did not turn out as badly as feared. Germany found alternative gas suppliers and built and put into operation new LNG terminals. Furthermore, the winter was not as harsh as expected.
The winter recession hit later than expected and was only officially confirmed in late May. After a drop in the gross domestic product of Germany in the fourth quarter 2022, the preliminary April estimate for GDP in the first quarter 2023 had been stagnation. Public and private consumption were the main factors driving GDP down and pushing Germany into a technical recession. German foreign trade nevertheless showed first signs of growth at the start of 2023 with global supply bottlenecks easing up and exports to the European Union and the United States picking up pace. Trade with China is still a little weak, but we expect a slight improvement in the second half of the year. In view of the good start to the year, we have upwardly adjusted our forecast for the export of goods and services to an increase by two percent in real terms in 2023 overall. Regarding imports, the import of intermediates is set to increase slightly. However, the lower energy and non-energy commodity prices will improve the terms
of trade, thus reducing the price of imports. All in all, we expect imports to stagnate following price adjustment. The resulting contribution of foreign trade to GDP-growth should therefore be around 0.9 percentage points.
BIP forecast for 2023: Change in real economic output over the previous year in percent
The high rate of inflation over the winter months took a considerable chunk out of real incomes. This will continue to be the case over the summer months as the agreed nominal wage increases including one-time payments will not fully compensate for the steep increase in prices. In the second half of the year, this trend is set to turn around and trigger a slight increase in purchasing power. Although the consumer climate index published by the GfK rose for the eight consecutive time in May, it is still at a very low level. On account of the weak start to the year, we expect private consumption expenditure to shrink by one percent. Public consumption expenditure is likely to go down with the termination of expenditures to combat the pandemic. The support measures of the federal government to compensate for the high energy prices are looking to be significantly lower than expected at the start of the year. In sum, public consumption expenditure is set to decrease by around one percent.
Investment in plant and equipment rose robustly in the first quarter 2023. This came as a surprise given the persistently high geopolitical tensions and weak global economic momentum, and is probably due to the fact that companies were not able to implement their investment plans in full during and directly after the pandemic. Savings have accumulated in the corporate sector as a result, savings
which are now gradually being spent. This is also reflected in the continuing high order backlog of capital goods producers. In view of the strong performance in the first quarter 2023 and delayed investments, we expect investment in plant and equipment to increase by three percent year on year. Regarding construction investment, we expect a decrease of four percent with residential housing pulling down performance particularly. The interest hikes of the European Central Bank have swiftly triggered a steep increase in mortgage rates. Residential housing is struggling additionally with the termination of government support and high construction costs. In public construction, the steep price increases are devouring the nominal budgets of public authorities. The situation is somewhat better in commercial construction, with the continuing boom of online shopping bolstering the demand for logistics buildings. Other stabilising factors are the investments of utility companies and the plans of the Deutsche Bahn to expand its railway network. Investment in other assets (software, research and development) recorded a strong rise at the start of the year, so we are sticking to our forecast of three percent growth. All in all, gross fixed capital formation is set to drop by a slight 0.4 percent year on year. In sum, we expect gross domestic product in the current year to stagnate at last year’s level following price adjustment.
Imprint
Bundesverband der Deutschen Industrie e.V. (BDI)
Breite Straße 29
10178 Berlin
T: +49 30 2028-0
www.bdi.eu
Lobbyregisternummer 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 II / 2023“, as of 19 June 2023.
Basic data for national accounts
GDP (price, seasonally and calendar adjusted) Change over previous period in percent
