Recovery
delayed
Global trade dampens prospects
▪ Following six months of recession over the winter, German economy currently stagnating. We expect economic output in 2023 overall to shrink by 0.4 percent
▪ Growth momentum from foreign trade losing steam. Exports are set to drop 0.5 percent this year following price adjustment. Exports to both China and the United States had fallen substantially at last count. German industry is participating less in global trade than it was before Russia’s war of aggression in Ukraine.
▪ Private consumption curbing growth. Real wages have been pointing down for the last three years and are only recovering gradually. Consumers remain reticent
▪ Industrial production currently still buoyed by high order backlogs for capital goods. These backlogs are slowly being worked off. Now supply bottlenecks have eased, a lack of orders has become the primary obstacle to bringing up production
After recession over the winter, German economy now treading water
Economic recovery has not set in as yet. In the second quarter of 2023, Germany’s real gross domestic product (GDP) stagnated at the same level as the previous quarter following seasonal and calendar adjustment according to figures from the German Federal Statistical Office. This confirms the first calculation of GDP for the current year from 28 July. In the fourth quarter 2022, economic output was down on the previous quarter by 0.4 percent, and in the first quarter 2023 by 0.1 percent.
Year on year, real GDP was 0.6 percent lower. The drop was slightly flatter following calendar adjustment as the second quarter this year had one working day less. Compared to the performance of the European Union, where economic output increased 0.2 percent over the first quarter 2023, Germany was below average. Economic output was also down in Italy, dropping by 0.4 percent in the second quarter following strong growth at the start of the year. The two other major EU member states, Spain and France, recorded considerably higher growth than the EU average at 0.4 percent and 0.5 percent respectively.
Germany’s economic output was generated by a workforce of 45.9 million employees working in Germany in the second quarter 2023. That is 340,000 people or 0.7 percent more than one year ago. The labour volume measured in hours remained steady year on year, despite an extra working day in the second quarter 2022.
A look at the income side of GDP shows that gross value added dropped by a total of 0.7 percent year on year while GDP stagnated. Bringing down gross value added in particular was retail, transport and hospitality and financial and insurance service providers, with declining gross value added of 2.8 and 1.4 percent respectively The gross value added of the production sector (excluding construction) contracted two percent. This fall was largely attributable to the energy sector as manufacturing output, which accounts for almost four fifths of production, rose slightly. As in the first quarter, information and communication services recorded the strongest growth in the second quarter, rising by three percent, followed by other service providers (which also includes art and culture) with an increase of 1.1 percent. Property service providers and corporate service providers stepped up their activities a little, going up by 0.7 percent and 0.5 percent respectively. In the construction sector, value added was down for the fifth quarter in a row. The drop this quarter at 0.1 percent was, however, much less pronounced than in the previous quarters.
On the expenditure side of GDP, price-adjusted private consumption was down by a total of 1.2 percent in the second quarter 2023 year on year. Consumers spent less, above all, on household furnishings and household goods (down 7.3 percent) and on food, tobacco and beverages (down 5.7 percent) For the first time in two years, expenditure on hotels and restaurants was negative year on year, dropping by 3.3 percent. Expenditure on housing, water and energy, as well as clothing and shoes decreased somewhat, falling by one and 1.6 percent respectively. Following price adjustment, spending was only up year on year on leisure, entertainment and culture (up one percent) and transport and communication (up 4.3 percent) Public consumption expenditure recorded a considerably bigger drop of 3.1 percent in the same period. All in all, consumption expenditure in the spring quarter was 1.7 percent down year on year.
After rising slightly at the start of the year, gross fixed capital formation increased by one percent in the second quarter 2023 year on year following price adjustment. The rise was fuelled largely by investment in plant and equipment, which grew 4.4 percent, its sixth consecutive quarterly rise.
Investment in vehicle fleets (up 14 percent) was the primary driver of growth Investment in machinery only increased slightly. The downward trend in construction investment flattened out considerably, with a decline of only 0.7 percent in the second quarter. While investment in residential housing dropped 1.1 percent, investment in non-residential construction was only a marginal 0.1 percent down year on year. Investment in other assets (patents and licences) was subjected to extensive downward adjustment in a review of the May 2023 figures. According to the current calculations of the Federal Statistical Office, investment in other assets was 0.3 percent down year on year in the second quarter following a drop of 0.8 percent in the first quarter of the year.
Exports of goods and services dropped by 1.6 percent following price adjustment in the second quarter 2023. While goods exports fell 2.2 percent year on year, the export of services was up 0.8 percent. Regarding imports, the import of goods was down 4.7 percent. Imported services, above all travel abroad, surged upwards once again, rising eight percent in the second quarter. Imports were nonetheless down by 1.8 percent overall. As imports recorded a more pronounced fall than exports, net exports still ended up in positive territory with a plus of 0.1 percentage points
Foreign trade curbed by weak trade with China
In the second quarter 2023, German exports dropped by 4.2 billion euros or 1.1 percent down to 392.5 billion euros (country-specific seasonally adjusted data is not available) The steepest fall in absolute figures was in trade with Italy and Austria. Exports to these countries fell by 2.6 billion euros or eleven percent in both cases. Exports to the United States, China and Switzerland were down by more than one billion euros in each case. Moving the other way, exports to Spain were up by 1.15 billion euros or 9.3 percent, to Turkey by 1.01 billion euros or 15.4 percent. Exports to France (up 2.6 percent) and the United Kingdom (up 3 6 percent) recorded more moderate rises
German imports of goods recorded a considerably larger drop in the second quarter 2023 year on year than exports, falling 10.1 percent. The largest drop in absolute figures was in imports from China (down 11 7 billion euros or 23 2 percent). Trade with Russia fizzled out almost entirely, crashing down 9.8 billion euros or 92 percent. With prices for fossil fuels much lower than last year, the imports from oil and gas supplying countries continued to fall. Imports from Norway dropped by six billion euros or 46.3 percent in nominal terms. Imports from the Netherlands and Belgium were one seventh lower in both cases. Swimming against the tide, imports from Hungary, the United Arab Emirates and Poland were up by just over 1.4 billion euros in each case
German exports and imports in Q2 2023 in selected countries
Year-on-year change
Sources: Federal Statistical Office, own calculations
In July 2023, goods exports were 0.9 percent down on June following seasonal and calendar adjustment. At the same time, the import of goods increased by 1.4 percent according to the latest figures. In the first seven months of the current year, exports were 2.9 percent up on the same period last year. Exports to EU member states, up 2.2 percent, expanded at a much slower pace than exports to countries outside the EU (up 4 2 percent). Exports to the Russian Federation almost halved over the
same period, tumbling down 41.3 percent. German imports, on the other hand, were down by a total of 4.9 percent in the first seven months of the current year. While imports from EU member states was up by one percent year on year, the import of goods from non-EU countries fell by a hefty 10.7 percent. The import of goods from Russia plunged down 89.3 percent.
Weak economy starting to impact labour market
According to preliminary data from the German Federal Statistical Office, the number of people in employment rose by a slim 15,000 in July 2023 after seasonal adjustment. Compared to one year ago, the number of people in employment was up by 0.7 percent to 45.92 million. Employment subject to social security contributions continued its upward trend. According to projections by the Federal Employment Agency, a total of 34.68 million people were in employment subject to social security contributions in June 2023 (most recent figure available). That is 233,900 people or 0.7 percent more than one year ago. The number of workers in full-time employment subject to social security contributions was 76,000 or 0.3 percent higher than one year ago, and the number of workers in parttime employment subject to social security contributions 158,000 or 1.5 percent higher
The other forms of employment exhibited divergent trends The number of self-employed people including contributing family members dropped by 11,000 or 0.3 percent to 3.90 million year on year. The number of people exclusively in marginal employment in June 2023, on the other hand, at 4.25 million, was 83,000 or two percent higher than one year ago, according to preliminary figures from the Federal Employment Agency.
In August, the number of unemployed people increased by 148,500 or 5 8 percent to 2.7 million. Following seasonal adjustment, unemployment rose by a narrow 18,000, after remaining more or less stagnant in July. The number of registered jobs dropped by 11,000 in August following seasonal adjustment. Without seasonal adjustment, the number of registered jobs was at 771,000 jobs. That is
116,000 or 13 percent less than one year ago. The unemployment rate in August 2023 was 5.7 percent as calculated by the Federal Employment Agency or 2.9 percent according to the ILO definition.
Order situation in industry only superficially stable
At first glance, the order intake of industry does not look too bad. In the second quarter 2023, incoming orders rose by a slim 0.5 percent over the previous quarter following calendar and seasonal adjustment after stagnating in the first quarter of the year. The volume of orders was thus almost as high as before the outbreak of the Covid pandemic in the fourth quarter 2019. Regarding the origin of new orders in the second quarter, orders from at home were two percent up on the previous quarter. Orders from abroad dropped slightly overall (down 0.6 percent). While demand from the euro area was 5.7 percent higher than the previous quarter, orders from third countries were 4.4 percent lower
However, that is only part of the picture. Excluding large orders, which tend to affect production figures over a very long period of time, the situation looks very different. Compared to the previous quarter, demand in the second quarter 2023 was down by 3.1 percent, following a drop of 1.6 percent in the first quarter. Year on year, the volume of orders was down by almost ten percent.
Among the main groups of industrial goods, incoming orders received by producers of intermediates were down by 2.1 percent in the second quarter 2023 compared to the previous quarter. This was the ninth contraction in a row. The drop in demand affected orders at home and from abroad in equal measure. The order intake was 3.2 percent down on the pre-pandemic level (fourth quarter 2019)
Capital goods producers collected 1.7 percent more orders in the second quarter 2023 than in the first quarter of the year Domestic orders recorded a particularly large rise of 5.7 percent while orders from abroad were down by a marginal 0.4 percent. The latest figures put incoming orders for this segment at 3.5 percent above the pre-pandemic level
Among consumption goods producers, orders turned around in the second quarter 2023 for the first time in three quarters, rising by 2.2 percent. While demand from at home was down for the fourth consecutive quarter, orders from abroad rose by a solid 4.4 percent. Compared to the fourth quarter 2019, producers of consumption goods received 2.3 percent more orders.
In July 2023, incoming orders of German industry slumped down 11.7 percent compared to the previous month according to preliminary calculations and following price, calendar and seasonal adjustment. The main reason for this large drop was the large orders inflating the figures for June Excluding large orders, the order intake was even slightly positive in July. Domestic demand was down by 9.7 percent, and orders from abroad were down by a slightly steeper 12.9 percent.
According to ifo Institute figures, the reach of orders in hand in manufacturing at the start of the third quarter 2023 remained the same as in the previous quarter. At 4.3 production months, it is only slightly lower than the record high recorded in October 2022 of 4.6 months. Among the main industrial groups, the reach of orders in hand for the producers of intermediates dropped slightly, down to 3.4 production months. The producers of capital goods needed slightly longer, currently 6.3 months, to work off their order backlog completely. Among producers of consumption goods, the reach of orders was once again at a new record high of 2.9 production months. Despite sluggish demand, the reach of orders in hand within industry remains very high.
According to Federal Statistical Office figures, the reach of orders in hand in manufacturing in June 2023 was 0.8 percent higher than in the previous month following calendar and seasonal adjustment, but 3.2 percent down year on year The domestic order backlog was 0.4 percent up on last year, while the backlog of foreign orders was down by a substantial five 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
Industrial production still moving sideways
Industrial output (production sector excluding energy and construction) in the second quarter 2023 was 0.6 percent down on the first quarter following calendar and seasonal adjustment, after an increase of 1.1 percent in the first quarter. Year on year, production in the second quarter of the year was up 1.1 percent. The production of energy contracted by a substantial 10.4 percent compared to the previous quarter following seasonal and calendar adjustment. Year on year, production here was down by as much as 20 percent. In the construction sector, activity was two percent lower after seasonal and calendar adjustment following a strong performance in the first quarter thanks to favourable weather conditions. Compared to the previous year, construction output in the second quarter 2023 dropped 0.9 percent.
Among the main industrial groups, the producers of intermediates suffered the biggest decrease in output, falling 1.7 percent below the previous quarter following seasonal and calendar adjustment. Year on year, the drop was even more pronounced at 5.4 percent. The production of capital goods only contracted by a minimal 0.2 percent following an increase of 1.8 percent in the first quarter of the year. Year on year, activity was up by a healthy 8.2 percent. These figures reflect the current recovery in vehicle production. Consumption goods producers increased their production over the previous quarter by 1.3 percent but were one percent down year on year
development in the manufacturing industry
At the start of the third quarter, production levels dwindled somewhat. In July 2023, industrial output (production sector excluding energy and construction) decreased 1.8 percent compared to
Change over previous year, two-month-comparison, in percent (right axis) Volume index in manufacturing, two-month-average, seasonally adjusted (left axis)
the previous month following seasonal and calendar adjustment Production was likewise down year on year (down 1.3 percent). Compared to February 2020, the last month before the outbreak of the pandemic, production was 7.4 percent lower following seasonal and calendar adjustment. Energy production was up in July for the first time since November 2022, rising by 2.2 percent, but still 20.6 percent down year on year. In the construction sector, activity increased by 2.6 percent on the previous month. On account of the weak performance by industry, output of the production sector overall nonetheless contracted by a slim 0.8 percent.
Industrial production is currently still being propped up by the high order backlogs in the capital goods sector which are now gradually being worked off. While supply bottlenecks are easing steadily, low incoming orders are becoming the primary barrier to increasing production. As of July, industrial production was more than two percent lower than in the second quarter 2023. Sentiment indicators have also most recently been signalling declining production in the next few months.
Capacity utilisation remains high
The utilisation of production capacities in the manufacturing sector was 1.4 percentage points down at the start of the third quarter. According to ifo Institute figures, industrial capacity utilisation at the start of the second half of the year was at 83 percent. This was the first time in two years that capacity utilisation was lower than on average over the last ten years. Capacity utilisation in the manufacturing sector excluding food dropped slightly more in the same period. At 83.1 percent, it was 1.5 percentage points below its long-term average.
Capacity utilisation dropped across almost all industries. Exceptions were the food, beverages and tobacco industry, producers of data processing equipment, and pharmaceutical products where capacity utilisation recorded slim rises. In textiles, the chemical industry and furniture production, the capacity utilisation of machinery was not only lower than the long-term average but also lower than before the outbreak of the Covid pandemic. Producers of motor vehicles and motor vehicle components and machinery manufacturers reported lower capacity utilisation, but, at 87.7 and 88.4 percent respectively, it remained above the ten-year average in both industries. Among the producers of metal products and electrical equipment, capacity utilisation was 1.9 percentage points lower than in spring 2023 and two percentage points below the longterm average
Industries record highly divergent trends in revenue
In the second quarter 2023, sales in the manufacturing sector were 1.8 percent higher year on year, following an increase of 8.8 percent in the first quarter. In the first six months of 2023, revenue was thus 5.2 percent higher than in the same period last year. Among the individual industries, vehicles and other transport equipment registered the strongest rise in sales with an increase of 19 percent and 18.6 percent respectively in the first half of the year. The electro industry, machinery manufacturing and food, beverages and tobacco also recorded double-digit growth. Apart from nonmetallic mineral products, revenue dropped in all other energy-intensive industries. The woodworking industry, chemicals and the paper industry all saw double-digit falls in their sales.
Following price adjustment, sales in the manufacturing sector increased by 0.5 percent in the second quarter 2023 compared to the previous quarter. Year on year, sales were even up by three percent. A look at the origin of sales reveals a divided picture. While sales from at home declined
by 1.1 percent year on year, revenue from abroad climbed 6.9 percent. Sales from the euro area increased by 5.5 percent year on year, not quite keeping pace with sales from non-EU countries (up 7 9 percent). Compared to the fourth quarter 2019, the last quarter before the outbreak of the pandemic, revenue was 0.1 percent higher. While domestic sales were still a good 4.8 percent below their pre-pandemic level, sales from abroad were 4.9 percent higher than before the outbreak of the pandemic
Manufacturing revenue* first half year 2023
Motor vehicle production
Other transport equipment production
Electronic industry
Machinery manufacturing
Food, beverages, tobacco
Manufacturing
Textiles, fashion, leather
Glass, ceramics, stone, industrial minerals
Pharmaceuticals
Metal production and metalworking sector
Print industry
Paper and pape
Chemical industry
Wood processing
*Change in percent, year on year
Source: Federal Statistical Office
Business sentiment of German industry at rock bottom
The ifo business climate index for Germany dropped to 85.7 points in August, its fourth consecutive fall and its lowest level since October 2022 when concerns were high that gas would be in short supply over the coming winter. Companies were not only unsatisfied with current business, but the majority were also pessimistic about their prospects for the next six months. Sentiment was down across all sectors Among service providers, ratings of current business and business prospects for the upcoming months have cooled down considerably. The lull in industry is also affecting transport and logistics. For the first time since December 2022, the majority of service providers are feeling pessimistic. Sentiment is even gloomier among retailers and wholesalers, where the evaluation of current business has deteriorated substantially. Business prospects, which were already at a very low level, have also continued to cloud over. In mainstream construction, the business climate index continued its downward path for the fourth consecutive month with both current business and business prospects sliding down further. The business climate index has also continued to fall in manufacturing, with companies particularly unhappy with current business. For the first time since October 2020, the rating of current business slipped into negative territory and, with incoming orders subsiding, prospects also deteriorated further. The ifo index for manufacturing has consequently entered into recession quadrants. The export prospects of industry dropped for the fourth time in a row in August and have been rated as negative by the majority of companies for the last three months. According to the ifo Institute, only half as many companies as last year are still struggling with supply bottlenecks, down to 26 percent. The number of companies
bemoaning a lack of orders has, on the other hand, more than doubled in the same period up to currently 32.9 percent
Outlook
It is well known that a single swallow does not make a summer. In much the same way, our optimistic expectations at the start of the summer have failed to pan out. Economic recovery has still not set in following the weak winter months 2022/2023. Judging by the sentiment indicators of German industry, economic recovery is likely to take some time in coming yet. Sentiment among German companies is at rock bottom and there is no improvement on the horizon in the medium term.
The performance in foreign trade has been particularly disappointing recently, prompting us to downwardly revise our forecast for exports. While the export of goods and services should still remain in positive territory in nominal terms, following price adjustment, we expect exports to decline by 0.5 percent. The reasons for this expected downturn are weak trade with China and restrained global economic growth with a below-average participation of German exports On the import side, weaker exports are likely to trigger a decrease in the imports of intermediates. In the first six months of the year, imports have already dropped by a little more than a quarter of a percent. In the current year, we expect imports to contract 1 5 percent Exports are not expected to fall by quite as much, so net exports should remain positive by 0.4 percentage points. The contribution of net exports to growth will only be half as much as we forecast in spring.
Private consumption will also put the brakes on economic growth. Real incomes have fallen in the last three years, also because of high inflation, curtailing purchasing power substantially. This trend
should gradually turn around as inflation continues to fall. The consumer climate indices published by the German Retail Federation, HDE, and consumer research company, GfK, were moving sideways according to the latest figures, having recovered slightly from the record lows recorded last autumn. As consumption spending in the first six months of the year was not as low as we anticipated, we have slightly upwardly adjusted our forecast for private consumption. We now expect private consumption expenditure to drop by only 0.5 percent this year overall. In the case of public consumption expenditure, large parts of the spending outflows to combat the pandemic have been terminated. The volume of the federal support measures to cushion the impact of the high energy prices for private households is also much lower than initially estimated. In view of the steep downturn in the first half of the year, we expect public consumption expenditure to drop 2.5 percent in the year overall. In sum, this would result in a decrease in consumption expenditure in 2023 of 1.1 percent
BIP forecast for 2023:
Change in real economic output over the previous year in percent
Investment in plant and equipment increased by just under six percent in the first half of the year according to the national accounts, despite rising interest rates and geopolitical tensions. This upward trend may well reflect the backlog in investment which built up during the pandemic. With supply bottlenecks easing additionally, investment plans are likely being implemented to the intended scale. In view of the strong performance in the first six months of the year, we now expect investment in
plant and equipment to increase by 3.5 percent over the previous year. The trend in construction investment was not quite as negative in the first two quarters of the year as we had anticipated. Although residential construction investment decreased on account of the steep rise in mortgage rates and high construction costs, there were some rays of hope in the first six months of the year in public construction and commercial civil engineering (roads and railroads). We therefore now only expect a reduction of two percent in construction investment overall this year
On account of the substantial adjustments made by the Federal Statistical Office, we need to make corresponding adjustments to our forecast for investment in other assets (software, research and development). In view of the course of the year so far, we anticipate a drop of 0.5 percent in real terms. All in all, gross fixed capital formation should be up on last year by a marginal 0.1 percent. In sum, we expect gross domestic product in the current year to drop by 0.4 percent compared to the previous year following price adjustment.
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 / 2023“, as of 13 September 2023.
Basic data for national accounts
GDP (price, seasonally and calendar adjusted) Change over previous period in percent