Quarterly Report Germany I/2024: German economy contracts 0.3 percent in 2023

QUARTERLY REPORT GERMANY

German economy contracts 0.3 percent in 2023

Industrial production 1.2 percent down year on year

▪ After stagnating over the summer months, economic output was down in the fourth quarter. The odds of a technical recession over the six-month winter period 2023/2024 for the German economy are rising steadily.

▪ Private consumption should gradually start to firm up. Steep upwind in nominal salaries and downward inflation are stabilising real incomes.

▪ Investment activity is set to decline over the course of the year. Construction investment is still suffering from weak residential construction.

▪ Foreign trade should start to pick up slowly as global trade turns up in the second half of the year. There are no signs of any notable impetus for growth on the horizon.

▪ Industrial production contracted again last year, down 1.2 percent. With capacity utilisation declining and meagre incoming orders, a turnaround is not yet on the cards.

▪ We expect economic output to rise by 0.3 percent this year. Climbing consumption will more than make up for the drop-off in investment.

German economy

Odds of winter recession rising steadily

The German economy finished off 2023 with a drop in economic output. In the fourth quarter 2023, Germany’s gross domestic product (GDP) fell 0.3 percent compared to the previous quarter following price, seasonal and calendar adjustment and according to German Federal Statistical Office figures After rising slightly in the first quarter 2023, GDP then stagnated in the second and third quarter. Year on year, real economic output in the fourth quarter was down on last year by 0.4 percent on account of the fewer number of working days (after calendar adjustment: down 0.2 percent), after decreasing 0.7 percent in the third quarter 2023. At the end of February 2024, the Federal Statistical Office confirmed GDP growth for 2023 overall of minus 0.3 percent as published in late January (after calendar adjustment: 0.1 percent)

In the fourth quarter 2023, Germany’s economic output was generated by a workforce of somewhat more than 46.2 million employees. That is 161,000 people or 0.3 percent more than one year ago and represents a new record high in employment for the second consecutive quarter. The labour volume of all workers measured in hours was down by 0.5 percent on account of fewer working days and a higher sickness rate.

On the income side of GDP, gross value added declined by 0.3 percent in the fourth quarter 2023 compared to the same period last year following price adjustment The main reason for the downward trend was the 2.2 percent drop in gross value added in manufacturing, while construction (up 0.8 percent) and services expanded in the final quarter of the year. The strongest growth in the service sector was among other service providers (up 2.5 percent), information and communications

(up two percent) and property service providers (up 1.3 percent). Public service providers, education and healthcare only increased gross value added by a good half a percent in each case. Gross value added was down for the third consecutive quarter year on year in retail, transport and hospitality (down 1.1 percent), and among financial and insurance service providers (down 1.8 percent)

On the expenditure side of GDP, price-adjusted private consumption was down by 0.6 percent year on year and still 1.6 percent lower than before the outbreak of the pandemic In the fourth quarter 2023, consumer spending was down particularly on household furnishings and household goods (down five percent). Spending on food, beverages and tobacco, clothing and shoes, and hotels and restaurants were all down by around two percent. Consumers spent only slightly less than last year on transport and communications (down 0.6 percent) and leisure, entertainment and culture (down one percent) Expenditure on housing, water and energy was higher both year on year (up 0.4 percent) and compared to before the pandemic (up 1.8 percent). Spending on leisure, entertainment and culture did increase 1.2 percent year on year but was still seven percent lower than in the fourth quarter 2019. After trending downwards over the first three quarters of the year, public consumption expenditure stagnated in the final quarter 2023. Following seasonal and calendar adjustment, state consumption was nonetheless still a good seven percent higher than before the pandemic

The downward trend in gross fixed capital formation accelerated at the end of the year, dropping 1.7 percent in the fourth quarter year on year. For the first time in almost two years, investment in plant and equipment was down year on year (down 0.4 percent). Investment in construction continued its decline of almost two years, with minus 2.2 percent in the fourth quarter year on year. The downtrend engulfed not just residential construction (down 3.1 percent), but also public construction (down 1.1 percent) and commercial construction (down 0.9 percent). Investment in other assets (including software and patents) only decreased 0.3 percent year on year. Changes in inventories of 0.4 percentage points compounded the situation. Overall, gross fixed capital formation fell three percent for the second quarter in a row.

Exports in the fourth quarter were four percent down year on year following price adjustment. While the export of services rose by a lean 0.2 percent, goods exports were down by a hefty 5.1 percent following price adjustment. The main factor fuelling the downward trend was the drop in the export of chemical and pharmaceutical products and data processing equipment. Imports contracted by 5.6 percent in the same period, pulled down mainly by the 8.9 percent drop in goods imports. The declines in the import of metals, data processing equipment and electrical equipment were particularly pronounced. The import of services, on the other hand, rose by a solid 5.2 percent. Business-related services did particularly well. Goods imports only increased by a minimal 0.2 percent. With imports decreasing more than exports, net exports contributed 0.7 percentage points to growth

Foreign trade remains weak at the end of 2023

In the fourth quarter 2023, goods exports were down by 26.8 billion euros or 6.5 percent (countryspecific seasonally adjusted data is not available) The steepest fall by far in absolute figures was in trade with Austria (down 3.9 billion euros or 17.3 percent) Exports to the Visegrád Group recorded a similar decrease (down 3.7 billion euros). Exports to the Netherlands and to China were down by around 2.5 billion euros in each case. Above-average drops were also recorded in exports to Italy (down two billion euros or 8.7 percent) and to Switzerland (down 1.9 billion euros or 10.4 percent).

The EU sanctions against Russia brought exports to the country down by more than one third (down 37.1 percent or 1.1 billion euros). Moving the other way, trade with the United Kingdom expanded (up 1.5 billion or 7.6 percent). Another positive exception was in exports to Mexico, which grew 505 million euros or 11.8 percent

German exports and imports in Q4 2023 in selected countries

Sources: Federal Statistical Office, own calculations

In the same period, the downward trend in German goods imports was more pronounced than in exports, recording a drop of 53.5 billion euros or 14.1 percent. Imports were down from almost all regions. The largest drop in absolute and relative terms was in imports from China which were down by 21.9 percent or 10.7 billion euros. The lower price of gas compared to one year earlier was the principal factor bringing imports from Norway down by almost one half to 7.5 billion euros. Imports from Russia in the fourth quarter were down to only one tenth of their level one year earlier. The lower gas

price was also the reason behind the drop in the value of imports from the Netherlands (down 14.9 percent) and from Belgium (down 18.2 percent). Imports from the United States and the United Kingdom were also downward, decreasing by around 1.1 billion euros in each case. Imports from Kuwait countered the general trend, increasing by 167 million almost fivefold, albeit from a low level

Labour market stable despite weak economy

According to preliminary data from the German Federal Statistical Office, the number of people in employment rose by 54,000 in January 2024 compared to the previous month after seasonal adjustment, following an increase of 28,000 in December 2023. Compared to one year ago, the number of people in employment was up by 235,000 or 0.5 percent to 45.81 million Employment increased particularly in employment subject to social security contributions According to Federal Employment Agency projections, a total of 34.92 million people were in employment subject to social security contributions in December 2023 (latest figure available) Seasonally adjusted, that is 19,000 people more than in November 2023 and 214,000 more people than one year ago. The number of workers in full-time employment subject to social security contributions was only just 14,500 or 0.1 percent higher than one year ago, and the number of workers in part-time employment subject to social security contributions 199,200 or 1.9 percent higher.

The latest figures in other forms of employment show diverse trends. The number of self-employed people including contributing family members decreased by 36,000 or 0.9 percent to 3.9 million in the fourth quarter 2023 year on year. The number of people exclusively in marginal employment was a slight 6,900 higher according to preliminary Federal Employment Agency projections, up to 4.2 million in December 2023. That is 13,400 or 0.3 percent more than one year ago In February 2024, the number of unemployed people increased by 139,600 or 7.4 percent year on year, up to 2.81 million. The unemployment rate in February 2024 was 5.9 percent as calculated by the Federal Employment Agency or 3.1 percent according to the ILO definition.

Large orders trigger large rise in incoming orders end of 2023

In the final quarter of last year, German industry registered a robust rise in new orders. In December, incoming orders were 8.9 percent up on the previous month following price, calendar and seasonal adjustment, according to preliminary figures. That represents the third-largest month on month increase since the data series started in 1991. The only two larger rises in incoming orders were at the beginning of the Covid pandemic in May and June 2020 following steep drops in the two preceding months. The solid increase in incoming orders was mainly fuelled by the high number of large orders. Excluding large orders, the order intake for industry was down by 2.4 percent in December. Domestic orders, up 9.4 percent, slightly outpaced foreign orders, which expanded 8.5 percent. Among foreign orders, orders from the euro area were particularly buoyant, increasing by a good third. Demand from third countries dropped by a very tangible 7.5 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

On account of the good performance in December, orders managed a minimal 0.1 percent rise in the fourth quarter 2023 compared to the previous quarter following seasonal and calendar adjustment. Year on year, however, incoming orders were down by 3.1 percent. Looking at the origin of orders, incoming orders from at home recorded a hefty 5.7 decrease year on year. Orders from abroad only dropped by 1.3 percent, with very mixed trends in the different regions. Demand from the euro area was up by a solid 8.3 percent year on year, while orders from third countries dropped by a pronounced 7.5 percent.

Among the main industrial sectors, the producers of intermediates suffered the biggest drop, with incoming orders down 6.1 percent year on year. Demand from at home (down seven percent) decreased slightly more than demand from abroad (down 5 3 percent). Capital goods producers received only 1.2 percent less orders in the fourth quarter 2023 year on year, with domestic demand down by four percent while foreign orders managed a tiny rise of 0.2 percent. Consumer goods

producers also struggled with weak domestic demand in the final quarter of the year (down 9.1 percent). With demand from abroad stagnating for the second time in a row, the volume of new orders only dropped by 3.6 percent overall.

Order backlogs thinning out tangibly

Deflated by persistent weak demand, the reach of orders in hand in manufacturing at the start of the first quarter 2024 was down to 3.7 production months according to Ifo Institute figures Order books were nonetheless still fuller than before the outbreak of the pandemic in late 2019. Among the main industrial sectors, the backlog of orders for producers of intermediates at 2.9 production months was only slightly higher than its pre-pandemic level. Capital goods producers experienced a clear drop in their order backlog over the past year. At 4.7 production months, it is only just hovering above the longterm average. Consumer goods producers, on the other hand, saw their order backlog increase a little at the start of the year. At 2.6 production months, it is only 0.2 months below the all-time record

According to Federal Statistical Office figures, the price-adjusted reach of orders in hand in manufacturing in December 2023 was 5.1 percent lower year on year. This was also the tenth consecutive drop. While the backlog of domestic orders was only 2.1 percent lower than in December 2022, the backlog of foreign orders slimmed down by a more substantial 6.6 percent.

Industrial production drops for the second consecutive year

In December 2023, the downward trend in industrial production which started in the middle of the year continued, falling 1.5 percent compared to the previous month following seasonal and calendar adjustment. While construction activity decreased 3.4 percent in December compared to the previous

Production development in the manufacturing industry

month, energy production expanded by 4.1 percent. Overall, the output of the production sector (manufacturing, energy and construction) was 1.6 percent lower than in November 2023 and three percent lower than in December 2022.

The December figures round off the results for the fourth quarter 2023. Industrial production in the fourth quarter was thus down on the previous quarter by 2.2 percent following seasonal and calendar adjustment. In the two preceding quarters, production had already dropped by two percent and 0.8 percent respectively. Compared to the level of activity before the outbreak of the Covid pandemic, industrial production was all of 7.1 percent lower. In 2023 overall, industrial production was down by 1.2 percent. This is the second consecutive annual decrease following a 0.3 percent drop the previous year

Production, 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), in percent

Source: Federal Statistical Office

For the first time in four years, industrial production decreased across all main industrial sectors both quarter on quarter and year on year. The producers of intermediates produced 3.7 percent less than in the third quarter and five percent less than in the same quarter one year ago. Among capital goods producers, the drop in production was moderate at minus 0.5 percent quarter on quarter and minus 1.5 percent year on year. Consumer goods producers produced a considerable 3.4 percent less than in the third quarter 2023. Year on year, production was down by a much larger 7.3 percent.

Performance in the fourth quarter 2023 was very mixed among the main industries Other transport equipment was the only industry that managed to notch up a healthy increase, expanding production by 6.8 percent. Vehicle production was also upward in the fourth quarter, recording a small rise of 1.2 percent, as was chemical production with an increase of 0.8 percent. However, the majority of industries saw production decline in the final quarter of 2023. While the production of data processing equipment stagnated, the production of electrical equipment tumbled by more than ten percent. The

producers of glass and ceramics, non-metallic minerals, paper and pharmaceuticals also all recorded double-digit drops in production. Metal producers and metalworkers reduced their output by 3.3 percent. The producers of metal products also curbed production by 5.3 percent and machinery manufacturers by 6.1 percent. The less economically volatile sectors, food and clothing, also saw production drop by around three percent in each case

Capacity utilisation continues to dwindle

At the start of 2024, industrial capacity utilisation continued to point down. The utilisation of production capacities in the manufacturing sector was at 81 percent at the beginning of the first quarter, according to ifo Institute figures. That represents a decrease of 3.4 percentage points compared to one year ago. Calculated every quarter, capacity utilisation was also 3.2 percentage points lower than on average over the last ten years. Industrial capacity utilisation excluding food was also down by a considerable 3.5 percentage points year on year, and 3.6 percentage points lower than on average over the last ten years.

Among the individual industries, the chemical industry was among the few exceptions that saw capacity utilisation increase quarter on quarter. At 74.3 percent, utilisation here was still more than six percentage points lower than on average over the last ten years. The producers of pharmaceuticals also saw capacity utilisation turn up, but it was still 3.1 percentage points lower than the ten-year average. Producers of optical and electronic equipment not only recorded a hefty drop in capacity utilisation but, at 78.8 percent, it was a whole six percentage points below the average over the last ten years. The producers of data processing equipment also saw their capacity utilisation drop but not below its pre-pandemic level. Activity was also downward among vehicle producers, machinery manufacturers and the producers of metal products, but still higher than in late 2019, according to the latest figures. One of the few industries in which activity has recently increased and risen above the ten-year average is the food, beverages and tobacco industry. Capacity utilisation in the textile industry, on the other hand, registered a drop of 8.8 percentage points.

Manufacturing revenue tails off at yearend

Real manufacturing revenue in the fourth quarter 2023 was 1.9 percent down on the previous quarter. Year on year, sales were down by as much as 3.3 percent. This was the second consecutive quarter in which revenue was lower than before the outbreak of the Covid pandemic. The downturn was triggered principally by weak domestic sales which were 5.1 percent down year on year. Revenue from abroad was also down year on year, but only by 1.8 percent and therefore still 1.9 percent higher than before the outbreak of the pandemic. In 2023 overall, revenue fell by a slim 0.3 percent, pulled down by the 2.9 percent drop in domestic sales. Foreign sales were up 2.1 percent.

In nominal terms, manufacturing revenue decreased 3.9 percent overall in the fourth quarter 2023 year on year. Energy-intensive industries once again recorded double-digit drops in revenue, including the chemical industry (down 17.5 percent), the paper industry (down 17.4 percent) and metal producers and processors (down 13 4 percent). Factoring out energy-intensive industries, fourth quarter revenue was still slightly negative, at minus 0.7 percent. While the food, beverages and tobacco industry (down 0.3 percent), the textile and clothing industry and machinery manufacturing (both down 0.7 percent) saw their revenue drop slightly, the electro industry recorded

a decrease of 3.5 percent following on from a ten percent increase in the third quarter Vehicle production (up one percent) and other transport equipment (up 3 8 percent) were among the very few exceptions with upward revenue in the final quarter of the year.

Manufacturing revenue* (fourth quarter 2023)

Motor vehicle production

Food and tobacco

Machinery manufacturing

Textiles, fashion, leather

Pharmaceuticals

Metal products

Electronic industry

Manufacturing

Glass, ceramics, stone, industrial minerals

Metal production and metalworking sector

Energy-intensive

Paper and

Other transport equipment production *Change

Gloomy prospects for industry

On account of the downtrend in production over the course of 2023, manufacturing started out the new year with a negative statistical overhang. If the volume of industrial production remains at its fourth quarter 2023 level this year, the annual result would be minus 2.8 percent. In contrast to last year, all main industrial sectors started out the year 2024 with a negative overhang. The trend in production last year was similar for both intermediates and consumer goods resulting in a negative statistical overhang of 3.7 and 3.6 percent respectively. The negative statistical overhang for capital goods producers is somewhat less at 1.8 percent on account of the slightly flatter production curve last year.

The purchasing managers’ index for manufacturing lost ground steadily from the beginning of 2023 until reaching its low of the year of 38.8 points in July. Sentiment then brightened up considerably. Although the index rose for the sixth time in a row in January 2024, at 45.5 index points, it was still far below the threshold value to expansion of 50 The latest figures from February 2024 show a drop of three points which means the index has lost more than half of the ground gained since its low last summer. German industry is still not on an upward trajectory.

Ifo business climate index: sentiment improves slightly but no turnaround as yet

Sentiment in German industry improved ever so slightly in February 2024. The Ifo business climate index rose 0.3 index points compared to January. While companies rated their current situation as unchanged, they were somewhat more optimistic about their prospects for the next six months. Among the individual sectors, sentiment brightened the most among service providers. Service providers

were more positive both about their current business and about future prospects. The index for sentiment in retail and wholesale dropped for the third time in a row, with the rating of current business considerably gloomier. Prospects for the next six months were up slightly on the preceding month but still rated negatively by the majority of companies. Sentiment in mainstream construction also improved a little. Construction companies rated their current situation as better than at the start of the year, but prospects fell to their lowest level since the start of this data series in 1991. In manufacturing, the improved sentiment seen at the beginning of the year was very brief with the index directly losing the points gained in January in February. Current business has not been rated as negatively since September 2020. At the same time, the prospects going forward remain almost unremittingly negative. Order backlogs are also continuing to diminish. Companies have announced more production cuts. Export prospects, on the other hand, improved somewhat in February 2024 after falling the two preceding months but have still been rated as negative by the majority of companies since June 2023.

Outlook

In 2022, the German economy managed to continue growing despite the war in Ukraine and the high energy prices this resulted in. The high backlogs in industry and gradual easing of supply chain bottlenecks enabled slight growth despite the high burdens on companies and private households caused by the steep energy prices. At the start of 2023, the German economy lost steam even though energy prices had decreased. Despite large-volume federal government aid measures, consumers saw realincomes drop substantially on account of the high rate of inflation The multiple hikes in interest rates of the European Central Bank did manage to contain the upward pressure on prices but also had side effects. The property market was particularly badly affected but other investment activity also fell.

Apart from the first quarter 2023, economic output dropped steadily compared to the previous year. As in the Covid year 2020, German GDP contracted in the year overall

There are many indications that the economy will fail to find its feet this year. Industry order backlogs are melting as fast as snow in the sun and incoming orders remain weak Industrial capacity utilisation has been below its long-term average for more than six months now. Early indicators for the development of production going forward, such as the truck toll mileage index, point to a sideways movement at best. Services did expand activities slightly in the final quarter of 2023, but the important retail, transport and hospitality sector continued its downtrend. Sentiment indicators such as the purchasing managers’ index and the Ifo business climate index are above their low points, but the latest figures show another setback. German GDP may well drop slightly in the first quarter 2024 compared to the previous quarter. As we are starting off the year with a negative statistical overhang of minus 0.2 percent, this would severely jeopardise growth in 2024 overall.

In the current year, the biggest factor of uncertainty is private consumption After more than three years of losses in the real incomes of private households, they should now start to rise with inflation dropping and higher nominal wage agreements. Furthermore, the number of people in employment has continued to rise, particularly employment subject to social security contributions which climbed to a new record high at the beginning of the current year. This could well set the stage for a pick-up in private consumption. The development of private consumption in the fourth quarter last year was already a positive surprise with a slight increase in private consumer spending compared to the previous quarter. The development of the savings rate will be one of the main factors determining whether private consumption will continue its uptrend. In February, the consumer climate index published by consumer research company GfK indicates a slight recovery. However, the recently increased propensity to save may stem consumption. We expect consumer reticence to wear off in spring as consumers start to feel more confident about the future. Coupled with growing real incomes, we believe private consumption could rise by as much as 0.8 percent following price adjustment. Together with state consumption expenditure, which is set to grow by real 0.7 percent this year according to the current annual economic report of the federal government, this would result in an overall increase in consumption expenditure of 0 8 percent

Investment activity is likely to drop over the course of the year. While the gap in investment in plant and equipment which opened up over the Covid period has not yet been bridged and the volume of investment needed for the ecological and digital transformation remains high, business location factors such as the internationally comparatively high energy costs, regulatory uncertainties and high geopolitical tensions are all not encouraging investment. In the current year, we expect to see investment in plant and equipment rise by only 0.2 percent. Construction investment is likely to record another substantial drop of around 3.5 percent. The downtrend in building permits for residential construction again accelerated last year. Commercial construction is also not in good shape with permits for office and administrative buildings as well as retail and warehouse space also pointing down. There were, however, positive signs from commercial civil engineering. The Deutsche Bahn has earmarked substantial funds for railway maintenance and new construction. Further investments are also expected in new power lines. Regarding public construction, the federal government has allocated further funds for the expansion of transport infrastructure. But local authorities are the largest public contractor for construction measures, accounting for around 60 percent, and these are mostly in a tight financial situation Investment in other assets (software, research and development) should start to

recover somewhat following two weak years We expect a real increase of two percent here. All in all, this would result in a drop in gross fixed capital formation this year of 1.3 percent year on year.

BIP forecast for 2024:

in real economic output over the previous year in

Sources: Federal Government (February 2024; *Private households and private non-profit institutions serving households), Board of Experts (November 2023); **including private households and private non-profit institutions, own calculations

After a weak year last year, we expect foreign trade to pick up slightly The growth prospects for our most important trade partners look rosier than at home. The European Commission anticipates growth of one percent for the euro area this year. The US economy could grow by around two percent this year according to IMF estimates (2024). The major unknown variable is once again China, whose importance for German exports diminished last year. The further developments in China’s stricken property sector could well have a negative impact not only on China’s domestic economy but also on the country’s trade partners. The latest figures show continued subdued sentiment among exportoriented companies, but we still expect global trade to pick up pace in the second half of the year and that German exporters will participate more than last year. We are slightly more optimistic here than the federal government (2024) and expect the export of goods and services to increase by one percent this year. An increase in exports will also increase the import of intermediates. As consumption is also set to gather momentum, which will additionally fuel the volume of imports this year, we expect the import of goods and services to slightly outpace exports this year and grow by 1.2 percent. In contrast to this year, net exports will consequently not make a positive contribution to growth this year. All in all,

we expect Germany’s gross domestic product this year to increase by 0.3 percent year on year in real terms

of exports in the 12 most important export markets (2023)

Sources

Bundesregierung (2024). Jahreswirtschaftsbericht 2024. Wettbewerbsfähigkeit nachhaltig stärken. 21 February. Berlin.

IMF (2024). World Economic Outlook Update. 30 January

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 I / 2024“, as of 6 March 2024

data for national accounts

Source: Federal Statistical Office