Quarterly Report Germany II/2024: Sluggish economic recovery by Bundesverband der Deutschen Industrie e.V.

German economy

Economic output falls over winter half-year 2023/2024

In the first quarter 2024, the gross domestic product (GDP) of Germany increased by 0.2 percent compared to the previous quarter following price, seasonal and calendar adjustment, according to figures from the German Federal Statistical Office. While the preliminary figures from the first estimate of 30 April 2024 were confirmed, the growth rate in the fourth quarter 2023 was downwardly adjusted from minus 0.3 percent to minus 0.5 percent. This means that economic output in the winter half-year 2023/24 was 0.3 percent lower than in the summer half-year 2023. Economic output was also 0.9 percent lower in the first quarter of 2024 than in the same quarter last year (down 0.2 percent after calendar adjustment).

In the first quarter 2024, Germany’s economic output was generated by a workforce of around 45.8 million employees. That is 129,000 people or 0.3 percent more than one year ago. The labour volume of all workers measured in hours was nonetheless down by 0.6 percent compared to the previous year according to preliminary figures from IAB, the federal research institute of the Federal Employment Agency.

Source: Federal Statistical Office

On the income side of GDP, gross value added declined 0.9 percent overall in the first quarter 2024 year on year following price adjustment. The main reason for the downward trend was the hefty 4.7 percent year-on-year drop in gross value added in manufacturing. The decrease in the construction sector was moderate in comparison, at only 0.9 percent. As in the previous quarters, only the services sector expanded (up 0.7 percent). Within services, the strongest growth was recorded by information and communications (up 1.9 percent), other service providers (up 1.7 percent) and property service

providers (up 1.2 percent). Public, education, healthcare and corporate service providers only increased gross value added by just over one half of a percentage point in each case. Gross value added was down year on year for the fourth consecutive quarter in retail, transport and hospitality (down 0.5 percent), and among financial and insurance service providers (down 1.2 percent).

On the expenditure side of GDP, price-adjusted private consumption stagnated year on year and was still nearly two percent lower than before the outbreak of the pandemic. In the first quarter 2024, consumer spending was down particularly on household furnishings and household goods (down 3.7 percent). Demand for hotel and restaurant services (down 2.6 percent) and clothing and shoes (down 1.8 percent) also decreased. Instead, for the first time in more than two years, consumers spent more on food, beverages and tobacco. Spending on transport and communications increased by one percent year on year and on leisure, entertainment and culture by 0.9 percent. Price-adjusted expenditure on housing, water and energy was a little higher both year on year (up 0.8 percent) and compared to before the pandemic (up 1.5 percent). Spending in the first quarter 2024 was lower than in the fourth quarter 2019 in all categories apart from healthcare and education. In contrast, public consumption expenditure expanded 1.5 percent in the first quarter 2024 and was eight percent higher than in the fourth quarter 2019 following seasonal and calendar adjustment.

The downward trend in gross fixed capital formation that has now been observed for more than one year continued with a decrease of 2.5 percent in the first quarter 2024 year on year following price adjustment. The fall was particularly pronounced in investment in plant and equipment, which fell 4.4 percent. Investment in other assets (patents and licences) also pointed down, sliding 0.5 percent. Construction investment has been dwindling for more than two years now and contracted another 2.1 percent in the first quarter of the year, with investment in residential construction (down 2.8 percent) turning in a particularly poor performance. Investment in non-residential construction was down by less than half as much (down one percent).

Exports of goods and services dropped 2.8 percent in the first quarter 2024 following price adjustment. Goods exports were down by 2.2 percent year on year and services exports by as much as 5.4 percent. Imports decreased slightly more, going down by 3.8 percent in the same period. While the import of goods fell by 4.5 percent, the import of services only slipped down 1.2 percent. As imports declined somewhat more than exports, net exports contributed a positive 0.3 percentage points to GDP growth.

Foreign trade by country

In the first quarter 2024, German goods exports were down by twelve billion euros or 2.9 percent year on year according to the foreign trade statistics of the Federal Statistical Office. The steepest falls in absolute figures were in trade with our neighbouring countries Italy (down 2.1 billion euros or 8.6 percent), the Netherlands (down 1.64 billion euros or 5.3 percent) and Austria (down 1.44 billion euros or 6.6 percent). Double-digit drops were recorded in exports to Turkey (down 1.07 billion euros or 13.4 percent), to India (down 687 million euros or 16.2 percent) and Brazil (down 434 million euros or 11.8 percent). Exports to Russia fell by one third at the start of the year (down 890 million euros or 32 percent). Compared to the first quarter 2022, exports have tumbled by almost two thirds. Swimming against the tide, exports were up to EU member states Poland (up 1.29 billion euros or 5.5 percent), Spain (up 431 million euros or 3.1 percent) and Romania (up 379 million euros or 6.7 percent). Trade with the United Kingdom also expanded in the first quarter 2024, rising by a moderate 672 million euros or 3.4 percent.

German exports and imports in Q1 2024 in selected countries Year-on-year change

Sources: Federal Statistical Office, own calculations

German imports declined by a total of 28 billion euros or 7.8 percent in the first quarter 2024 year on year. Imports were down amongst almost all trade partners with a very few exceptions. The largest drop in nominal terms was in trade with China (down 4.79 billion euros or 11.7 percent). Imports were also sizeably down from gas supplier countries Norway (down 3.18 billion euros or 31.7 percent), the Netherlands (down 2.79 billion euros or ten percent) and the United Arab Emirates (down 1.69 billion euros or 80 percent). Imports from Russia shrivelled to 1.09 billion euros which is only one third of the level recorded in the same period last year and 95.5 percent less than two years ago. Imports from the United States decreased by 1.55 billion euros or 6.3 percent. Goods imports from the United Kingdom

(minus 683 billion euros or 6.9 percent) also fell. Imports of goods from EU partner countries Poland, Austria and Italy were also down by around one billion euros in each case.

In April 2024, exports increased by 1.6 percent compared to March 2024 following calendar and seasonal adjustment. Exports also expanded year on year (up 1.9 percent). From January to April 2024, exports were a lean 0.3 percent lower year on year. Exports to EU countries decreased 0.4 percent, slightly more than exports to third countries (down 0.1 percent). Imports were down by 5.1 percent in the same period. Goods imports from third countries recorded a much greater decrease (down 8.2 percent) than imports from EU countries (down 2.1 percent), partially due to the lower prices for fossil fuels, most of which are imported from countries outside the EU.

Labour market: employment increasing but so is unemployment

The labour market has been slow to gather momentum this spring. According to preliminary data from the Federal Statistical Office, the number of people in employment rose by 25,000 in April 2024 compared to the previous month after seasonal adjustment, following an increase of 9,000 in March and 18,000 in February. Compared to April 2023, the number of people in employment was up by 109,000 or 0.2 percent to 45.92 million. This was nonetheless 300,000 less people than the record high recorded in November 2022.

Difference in the number of workers making social security contributions from the same month last year (right axis)

*seasonally adjusted in million

Source: Federal Employment Agency

The latest figures show little change in the number of people in employment subject to social security contributions. According to Federal Employment Agency projections, a total of 34.81 million people were in employment subject to social security contributions in March 2024 (latest figure available). Seasonally adjusted, that is 3,000 people fewer than in the previous month but 130,000 people or 0.4 percent more than one year ago. For some time now, growth has mainly been taking place in part-time employment. In March 2024, the number of workers in part-time employment subject to social security contributions was 10.5 million, which is 193,000 or 1.9 percent higher than

one year ago. The number of workers in full-time employment subject to social security contributions in March was 24.3 million, which is 59,000 or 0.2 percent lower than one year ago.

Regarding other forms of employment, the number of self-employed people including contributing family members decreased by 11,000 in the first quarter 2024, down to 3.85 million. That is 40,000 or one percent less than one year ago. The number of people exclusively in marginal employment increased by 10,000 in March 2024, following an increase of 5,000 in February, up to 4.17 million according to preliminary Federal Employment Agency projections. That is 8,000 more than one year ago. In May, the number of unemployed people increased by 178,800 or seven percent year on year, up to 2.72 million. After seasonal adjustment, the number of unemployed people was 25,000 higher than in April, following an increase of 9,000 in April compared to March. The unemployment rate in May 2024 was 5.9 percent as calculated by the Federal Employment Agency or 3.2 percent according to the ILO definition.

Incoming orders for industry still low

The hoped-for turnaround in incoming orders has not yet materialised. Following an increase in new orders in the fourth quarter 2023, the downward trend set in again in the new year with incoming orders going down 4.4 percent in the first quarter 2024 compared to the previous quarter. Year on year, incoming orders were down by a slightly higher 5.3 percent.

Regarding the origin of incoming orders, domestic orders were 5.8 percent lower in the first quarter 2024 compared to the fourth quarter 2023. Year on year, orders were a weighty 8.5 percent lower. Foreign orders were 3.5 percent lower in the first quarter 2024 quarter on quarter and 2.9 percent lower than one year ago. Demand from third countries was up by 2.2 percent following seasonal adjustment (down 2.7 percent year on year). Orders from the euro area dropped sharply, going down 11.5 percent compared to the previous quarter and 3.2 percent compared to the same quarter one year ago.

Among the main industrial sectors, the producers of intermediates registered 4.1 percent less orders in the first quarter 2024 after calendar and seasonal adjustment. Year on year, the order intake was 6.1 percent down. Demand from at home was down by 8.6 percent, considerably more than demand from abroad (down 3.6 percent).

Demand for capital goods was 4.8 percent lower in the first quarter 2024 compared to the previous quarter. Compared to the previous year, the order intake was 5.2 percent lower. Demand from at home and abroad followed a synchronous downward trend.

Among consumer goods producers, orders were down by 4.1 percent in the first quarter 2024 compared to the previous quarter following seasonal and calendar adjustment. Year on year, orders were down by 2.1 percent. Demand from at home was lower by a considerable 5.9 percent year on year. Foreign orders increased by a slim 0.3 percent.

The latest figures show orders bottoming out. In April 2024, the order intake of German industry overall was 0.2 percent down month on month and 1.6 percent down year on year according to preliminary figures and following price, calendar and seasonal adjustment. However, excluding large orders, which are subject to sharp fluctuations, incoming orders were up by 2.9 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

Order backlog in industry at lowest point?

The reach of orders in hand in manufacturing at the start of the second quarter 2024 was at a good 3.9 production months according to ifo Institute figures. This represents the first rise after more than one and a half years of downturn. Despite the weak order intake, a few favourable one-off effects played into the equation. The backlog of orders among producers of intermediates rose slightly, largely on account of the pick-up in energy-intensive industries. Among capital goods producers, the reach of orders in hand was up 0.4 to 5.2 production months boosted by a sharp recent increase in large orders. Among consumer goods producers, the backlog of orders dropped slightly down to 2.6 production months.

The Federal Statistical Office figures do not show any improvement yet. The price-adjusted reach of orders in hand in manufacturing in March 2024 was 0.4 percent lower. This was the third consecutive drop. While the backlog of domestic orders was only 1.1 percent lower than the previous month, the backlog of foreign orders remained almost steady (down 0.1 percent). Although order backlogs have continued to slim down, they are still one fifth higher than before the outbreak of the pandemic in 2020 following seasonal and calendar adjustment. According to industry insiders, many orders in the books are not being called off on account of the uncertain situation but are not being cancelled either.

Industrial production nudges up in April

In April 2024, industrial production increased by 0.3 percent compared to the previous month following seasonal and calendar adjustment. Year on year, industrial production was nonetheless 3.5 percent lower. The energy industry increased production by 1.6 percent compared to March. Construction output was 2.1 percent lower than in the previous month. Overall, the output of the

production sector was a minimal 0.1 percent lower than in the previous month and 3.9 percent lower year on year.

Sources: Federal Statistical Office, own calculations

After a revision of the preliminary March figures, industrial production increased by 0.3 percent in the first quarter 2024 following seasonal and calendar adjustment, after falling a good two percent in each of the two preceding quarters. Year on year, production was still down by 5.2 percent. The increase in production seen at the beginning of the year was primarily fuelled by a pick-up among energy-intensive industries, which raised their output by 4.3 percent in the first quarter 2024 compared to the previous quarter.

Among the main industrial sectors, production in the first quarter 2024 displayed the following trends. The producers of intermediates increased production by 1.4 percent quarter on quarter following seasonal and calendar adjustment. Production was still considerably lower year on year though (down 5.5 percent). The production of capital goods dropped by 1.6 percent. Year on year, production was down by 6.3 percent. Consumer goods producers recorded their third highest climb since reunification with an increase of 3.5 percent quarter on quarter. Year on year, production here was down by 1.5 percent.

On account of the good performance in the first two months of the year, the weaker production figures from March did not pull down the overall first quarter 2024 result too much. The downward trend in production in the manufacturing sector that has lasted a good year seems to have come to an end for the time being. Production is at a very low level, though. At the start of 2023, output was a good five percent higher than this year. The manufacturing sector started out the year with a negative carryover of 3.1 percentage points. Strong growth is therefore needed in the course of the year to bring in positive annual growth, but there has not been any sign of that yet. We still expect industrial output to decrease 1.5 percent year on year. Although the construction industry benefited from the mild weather at the

start of the year, production is still expected to point downwards in the further course of the year on account of the weak demand. Energy production was almost one fifth lower than before the outbreak of the pandemic at last count. All in all, the first quarter 2024 showed first signs of a gradual recovery of industrial activity.

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

Industrial capacity utilisation fragile

The downward trend in new orders is also affecting capacity utilisation. In manufacturing, capacity utilisation declined by 0.8 percentage points at the start of the second quarter compared to the previous quarter, going gown to 80.3 percent. In the last 15 years, capacity utilisation has only been lower during the global financial crisis and at the beginning of the Covid pandemic. Industrial capacity utilisation excluding food dropped to 80.3 percent in the same period, which is 4.2 percentage points lower than on average over the last ten years.

Trends in the individual industries were very mixed. While producers of data processing equipment and optical products followed the general downward trend and recorded a decrease in capacity utilisation of 1.6 percentage points, capacity utilisation among producers of electrical equipment dropped more than average, going down by 3.7 percentage points. Capacity utilisation among producers of food, beverages and tobacco, producers of metal products and machinery manufacturers was more than two percentage points lower than in the first quarter in each case. Capacity utilisation in the furniture and pharmaceutical industry was slightly higher in both cases. In textiles, capacity utilisation was up by 2.2 percentage points following historically low levels in both preceding years. In vehicle production, capacity utilisation increased by 0.8 percentage points to 86.3 percent bringing it back up to the average rate in the last ten years, in contrast to all other industries.

Manufacturing sales continue to drop at start of year

At the start of the year, price-adjusted manufacturing revenue slipped down a slight 0.5 percent in the first quarter compared to the fourth quarter 2023 following seasonal and calendar adjustment. This was the fifth consecutive quarterly drop. Year on year, the reduction was more pronounced at minus four percent. Looking at the origin of sales, domestic sales were down by 4.5 percent year on year. Revenue from abroad was down by 3.3 percent. Revenue from the euro area was 2.6 percent lower, while revenue from third countries was down by 3.9 percent.

Among the individual industries in nominal terms, the paper industry recorded the strongest drop in revenue, falling by 12.4 percent. A double-digit reduction in revenue year on year was also recorded by metal producers and processors (down 12.3 percent), in non-metallic minerals (down 11.9 percent) and in electronics (down 10.5 percent). Revenue in vehicle production and in textiles was down by 5.5 percent in both cases, in machinery manufacturing by 4.4 percent, and in food, beverages and tobacco by 2.2 percent. While revenue in the chemical industry was down by 8.2 percent, pharmaceuticals saw revenue climb 1.4 percent. Other transport equipment recorded the largest rise in revenue, with an increase of 5.6 percent.

Manufacturing revenue* (first quater 2024)

Other transport equipment production

Food and Luxury food Pharmaceuticals

Machinery manufacturing

Textiles, fashion, leather

Motor vehicle production

Chemical industry Manufacturing

Energy-intensive

Electronic industry

Glass, ceramics, stone, industrial minerals

*Change in percent, year on year

Source: Federal Statistical Office

Business sentiment unchanged

After improving for three months in a row, the ifo business climate index for Germany tread water in May. The companies surveyed rated their current business situation as slightly worse than in April but business prospects for the next six months as slightly improved. Among the individual sectors, service providers were less satisfied with current business for the first time in three months, but slightly more optimistic about their prospects for the next six months though not enough to turn out a positive result overall. In wholesale and retail, sentiment improved tangibly. Current business was also rated much more positively. This improvement was driven primarily by wholesalers. Business sentiment in mainstream construction improved for the fourth month in a row. Alongside a slight improvement in the current situation, construction companies were also more positive about their prospects. Sentiment has also brightened up further in manufacturing, with manufacturers more positive

both about current business and about their prospects for the next six months. Despite rising for four months in a row, the ifo business sentiment index remains in the recession quadrant. Sentiment in the German export industry has nonetheless brightened up moderately. Export prospects were up 0.3 points in May. For the first time since April 2023, positive ratings outnumbered the negative ratings.

Ifo Business-Cycle Clock

Reccession

Balances, seasonally adjusted

Source: ifo Institut

Outlook

Assesment of current business situation

Although the German economy recorded minimal growth of 0.2 percentage points in the first quarter of the current year, the revised figures for the end of 2023 were considerably weaker than those published at the start of the year. A technical recession did not set in, but economic output was lower in the winter half-year than in the summer. Growth at the start of the year was fuelled by the services sector and also the construction sector due to the mild weather. This special effect will probably flip into reverse in the second quarter as the parameters for construction remain persistently poor. Manufacturing did not pick up either, apart from the slight nudge up in energy-intensive industries. The good news is that many of the sentiment indicators are pointing to recovery in the second half of the year. Although current business is still rated as negative in many industries, the rating of business prospects for the next few months has brightened steadily over the last three to four months in trade, services, manufacturing and construction. The weekly activity index of the Deutsche Bundesbank has been pointing upwards slightly for a good month.

If this positive sentiment spreads to consumers, it could trigger the long-awaited pick-up in private consumption. With inflation falling and high nominal wage agreements lined up or already in force in many industries, disposable incomes of private households are set to rise considerably. A further boost to private consumption is the continuing upward trend in the number of people in work, particularly in

jobs subject to social security contributions. From the middle of the year onwards, pensions will be raised by over four percent, further enhancing consumer purchasing power. Although consumers remain uncertain and have so far shown reticence in spending their higher disposable income, we still expect consumption to pick up in the next few months. The HDE consumption barometer measured a substantial increase in June, its fifth consecutive monthly increase. The consumer sentiment index published by consumer research institute GfK pointed in the same direction in May. In addition to the increase in income prospects, the main factor behind the improvement in the consumer climate, the fourth time in a row, was a definite decrease in the propensity of households to save money. We expect consumer reticence to tail off by the middle of the year and stick to our growth forecast for private consumption of plus 0.8 percent in real terms. Together with public consumption expenditure, which is set to grow by 0.7 percent in real terms according to the annual economic report of the federal government, this will unleash an increase in consumption expenditure of 0.8 percent.

Investment in plant and equipment dropped slightly at the start of the year. Companies invested more in machines and equipment but substantially less in vehicles than at the end of 2023. Weak demand, regulatory uncertainties and energy costs that remain high on an international comparison are all factors dampening the propensity to invest. Indications for a slight pick-up are the slim increase in production recorded by capital goods producers in the last three months and the impending public investment in military procurement that will prop up investment in plant and equipment. We therefore continue to expect an increase in investment here in the current year of 0.2 percent.

Regarding construction investment, we continue to expect a substantial decrease of around 3.5 percent. This is not likely to change either on account of the good level of construction activity seen in the first quarter of the year with projects being pulled forward because of the mild weather or in the form of possible replacement construction after floods in some southern states of Germany. Residential construction is expected to continue downward in particular. After a reduction in building permits of more than one quarter last year, the trend is continuing downwards at a similar pace this year. In commercial construction, there are indications of increasing momentum in the construction of factory buildings but the downturn in the number of building permits for retail and warehouse buildings and office and administrative buildings continued to accelerate. There were positive signs from commercial civil engineering. At federal level, a good ten billion euros have been earmarked this year for investment in the new construction and maintenance of sections of the railway network. Investments are also scheduled for new power lines. Investment in other assets (software, research and development) dropped slightly in the first quarter of the year, contrary to our expectations. We nonetheless still expect investment levels in this area to recover by two percent in real terms following two weak years. All in all, this would result in a drop in gross fixed capital formation this year of 1.3 percent year on year.

German foreign trade has been slow to pick up momentum following its weak performance last year. Exports did increase slightly in the first quarter 2024 compared to the previous quarter and following price adjustment. Exports would have to increase substantially in the further course of the year to compensate for the negative carryover from last year. The figures this year so far do not indicate such a development. Trade with the European Union increased slightly, but trade with our large trading partners, the United States and China, has recently been on the sluggish side and the threat of trade disputes escalating are certainly not helping. According to the ifo Institute, sentiment in export-oriented enterprises has nonetheless brightened up somewhat in the last few months, so German exports may well benefit from the global economic recovery to a greater extent than expected. We therefore anticipate the export of goods and services to match last year’s level in the course of the year. Alongside an

increase in the import of intermediates, rising consumption will also add enough momentum to reach last year’s result. Overall, we do not expect net exports to contribute to growth. All in all, we forecast Germany’s gross domestic product this year to increase by 0.3 percent year on year in real terms.

BIP forecast for 2024: Change in real economic output over the previous year in percent

Sources: Federal Government (February 2024; * Private households and private non-profit institutions serving households), Board of Experts (May 2024); ** including private households and private non-profit institutions,*** including military weapon systems, own calculations eigene Berechnungen

Imprint

Bundesverband der Deutschen Industrie e.V. (BDI)

Breite Straße 29 10178 Berlin

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

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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 / 2024“, as of 24 June 2024

Basic data for national accounts

GDP (price, seasonally and calendar adjusted) Change over previous period in percent

Contribution to growth (in percentage points)

Source: Federal Statistical Office

Quarterly Report Germany II/2024: Sluggish economic recovery