Quarterly Report Germany III/2024: Economic lull persists by Bundesverband der Deutschen Industrie e.V.

German economy

Growth still sluggish

The German economy has still not found its feet. In the second quarter 2024, the gross domestic product (GDP) of Germany decreased by 0.1 percent compared to the previous quarter following price, seasonal and calendar adjustment, according to figures from the German Federal Statistical Office. Compared to the second quarter of the previous year, real GDP increased by 0.3 percent. After calendar adjustment, GDP stagnated compared to the previous year, as there was one more working day available in the second quarter of 2024

On an international comparison, the German economy is trailing far behind. In the second quarter of the year, the GDP of the European Union and the euro area did not contract but expanded by 0.3 percent compared to the first quarter 2024. The performance of the German economy was also weak compared to the other major EU member states. In Italy, GDP rose 0.2 percent in the second quarter compared to the previous quarter, in France by 0.3 percent and in Spain by 0.8 percent. The strongest growth was recorded by the Netherlands (up one percent) and Poland (up 1.5 percent).

Growth in real GDP in percent

Source: Federal Statistical Office

In the second quarter 2024, Germany’s economic output was generated by a workforce of around 46.1 million employees. That is 167,000 people or 0.4 percent more than one year ago. The labour volume of all workers measured in hours was up by 0.8 percent compared to the previous year according to preliminary figures from IAB, the federal research institute of the Federal Employment Agency. Regarding the income side of GDP, growth momentum came exclusively from the service sector as it had already in the first quarter. The strongest growth within services was once again recorded by information and communications (up 3.3 percent), as in the first quarter, followed by

property and corporate service providers, with growth of more than two percent in both cases. Gross value added among public, education and healthcare service providers and in retail, transport and hospitality also increased 1.6 percent in both sectors. Among other service providers (which also includes art and culture) and financial and insurance service providers activity only increased by slightly more than one percent. The strongest drops in output were recorded by the construction industry, with gross value added falling 3.4 percent after a decrease of 3.5 percent in the first quarter. Gross value added in the manufacturing sector dropped 1.2 percent, after contracting 4.3 percent already at the start of the year.

On the expenditure side of GDP, price-adjusted private consumption nudged up 0.1 percent in the second quarter 2024 year on year. Consumers particularly increased their spending on transport (up 3.7 percent) and on information and communications (up 2.9 percent). Consumers also spent a substantial two percent more in real terms on leisure, entertainment, culture and education services and on healthcare services. Expenditure on housing, energy and water and food was down by just under one percent in each case. Consumers also proved reticent to splash out on hotel and restaurant services (down 6.5 percent), clothing and shoes (down 3.5 percent) and alcoholic beverages and tobacco products. In the same period, state consumption expenditure increased by a much more buoyant 2.9 percent. Overall, consumption expenditure was up by 0.9 percent in the spring quarter.

The lull in investment that has persisted since late 2022 continued throughout spring 2024. Gross fixed capital formation decreased 2.9 percent in the second quarter following price adjustment, after falling 3.5 percent in the first quarter of the year. The main downward factor was investment in plant and equipment which plummeted 6.5 percent, the fifth consecutive quarter with negative growth. Investment here was hit particularly by a 12.6 percent decrease in investment in vehicles caused by baseline effects. The acquisition of machinery and equipment also dropped by a substantial 3.3 percent. The downward trend in construction investment slowed somewhat, going down to minus 3.2 percent. While residential construction investment decreased 4.6 percent, investment in nonresidential construction only dropped by 1.1 percent year on year. Figures for investment in other assets (patents and licences) were subject to an extensive upward revision of ten percent compared to the figures as of May 2024. According to the latest calculations of the Federal Statistical Office, investment in other assets increased by 4.4 percent year on year in the second quarter, following a rise of 4.9 percent in the first quarter of the year.

Exports of goods and services increased by 0.3 percent year on year in the second quarter 2024 following price adjustment. Goods exports expanded 0.4 percent while services exports dropped 0.3 percent. Regarding imports, the import of goods fell by 3.7 percent, while the import of services, above all travel abroad, increased by 2.3 percent. Overall, imports were nonetheless two percent lower. With exports rising slightly and imports reducing, net exports contributed a positive one percentage point to GDP growth.

Foreign trade: exports to United States and United Kingdom rise, while trade with China remains weak

In the second quarter 2024, German goods exports were down by 0.8 billion euros or 0.2 percent year on year to around 400 billion euros in nominal terms (seasonally adjusted figures are not available for all states). The steepest fall in absolute figures was in trade with China. Exports to this country dropped by 1.08 billion euros or 4.3 percent. Exports to Austria (down 4.7 percent) and to Turkey (down 12.4 percent) were both down by more than 900 million euros. Exports to Russia fell by 353 million

euros or a good sixth. Going the other way, exports were markedly buoyant both to the United States, rising by 2.28 billion euros or six percent, and to the United Kingdom (up 1.55 billion euros or 8.2 percent). Exports to Switzerland and Poland also recorded above-average growth, with an increase of 1.26 billion euros and 907 million euros respectively.

German exports and imports in Q2 2024 in selected countries

Year-on-year change increase

Sources: Federal Statistical Office, own calculations

The downward momentum in the import of goods to Germany, at minus 4.7 percent, was decidedly more pronounced than the decrease in exports in the second quarter 2024. The largest drop in goods imports in nominal terms was in trade with the Netherlands (down 2.57 billion euros or 9.6 percent) followed by China (down 1.9 billion euros or 4.9 percent). Partially on account of the lower prices of fossil fuels this year compared to last year, imports from the United Arab Emirates were down by 1.75 billion euros or 87 percent. Imports from Singapore were down by more than one half (down 1.47 billion euros or 59.3

Imports from Germany’s neighbours, Poland and Austria, were down by a good six percent in both cases. Imports from Russia have plummeted from a good

11.7 billion euros down to 490 million euros in the space of the last two years. Bucking the overall trend, imports from Vietnam increased by a good sixth or 526 million euros.

Labour market shows first signs of weakness

According to preliminary data from the Federal Statistical Office, the number of people in employment rose by 4,000 in July 2024 after seasonal adjustment. Compared to July 2023, the number of people in employment was up by 0.3 percent to 46.19 million. The number of people in employment subject to social security contributions, on the other hand, dropped for the first time since April 2023. According to Federal Employment Agency projections, a total of 34.94 million people were in employment subject to social security contributions in June 2024 (latest figure available) after seasonal adjustment. That is 9,000 people fewer than in May. While the number of workers in part-time employment subject to social security contribution increased by 211,000 or two percent year on year in June 2024, the number of workers in full-time employment subject to social security contributions was 68,000 or 0.3 percent lower, down to 24.22 million.

Trends in other forms of employment were very mixed. The number of self-employed people including contributing family members decreased by 29,000 or 0.8 percent in the second quarter 2024, down to 3.82 million. The number of people exclusively in marginal employment in June 2024 was 14,000 or 0.3 percent less than one year ago, down to 4.25 million, according to preliminary Federal Employment Agency projections. The number of unemployed people increased by 176,500 or 6.5 percent in August 2024 year on year, up to 2.87 million. After seasonal adjustment, the number of unemployed people in August was only 2,000 higher, following an increase of 17,000 in July. The number of registered vacancies dropped 10,000 in August after seasonal adjustment. Before seasonal adjustment, the number of vacancies was 698,900. That is 72,000 or 9.4 percent less than one year ago. The unemployment rate in August 2024 was six percent as calculated by the Federal Employment Agency or 3.4 percent according to the ILO definition.

June sees first increase in incoming orders this year

In June 2024, incoming orders received by German industry increased 3.3 percent compared to the previous month according to preliminary figures and following price, calendar and seasonal adjustment. This is the first time incoming orders have increased following five consecutive drops The order situation including large orders was also rosier, with a rise of 3.3 percent. Orders were nonetheless still down 11.8 percent year on year. Order levels were buoyed in particular by an increase in domestic demand of 9.1 percent month on month. Demand from abroad only expanded by a lean 0.4 percent. While orders from third countries nudged up one percent, orders from the euro area were 0.3 percent lower than in May.

The June figures now in complete the figures for the quarter. In the second quarter, industrial enterprises received 1.3 percent less orders than in the previous quarter following calendar and seasonal adjustment. Year on year, orders were down for the seventh consecutive quarter, falling 7,7 percent. Looking at the origin of orders in the second quarter, orders from at home increased 1.3 percent. Orders from abroad were a sizeable 3.1 percent lower. While demand from the euro area decreased by a moderate 0.4 percent, orders from third countries were down by a hefty 4.7 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

Among the main groups of industrial goods, producers of intermediates recorded a drop of one percent in incoming orders in the second quarter compared to the preceding quarter and following calendar and seasonal adjustment. This represents the second consecutive drop. Domestic demand fared worse, falling 1.9 percent compared to a slight drop of 0.3 percent in orders from abroad.

Capital goods producers received 2.2 percent less orders in the second quarter 2024 than in the first quarter. Orders from abroad were down by 5.5 percent, while demand for capital goods at home

increased by 4.1 percent in the same period. Year on year, however, incoming orders were down by as much as 10.5 percent.

Among producers of consumer goods orders in the second quarter 2024 were up by 3.1 percent compared to the first quarter 2024. Foreign orders, growing 4.1 percent, clearly outperformed domestic orders, which only rose 1.6 percent. This put orders at 19.6 percent higher than the precrisis level but still one percent lower than in the second quarter last year.

The reach of orders in hand across the manufacturing sector remained steady at the start of the third quarter 2024, according to figures from the ifo Institute. Standing at 3.9 production months, it is nonetheless 0.4 months or a good nine percent less than one year ago. Among the main industrial groups, the reach of orders in hand among producers of intermediates dropped 0.2 production months year on year, down to 3.2 production months. Among producers of capital goods, the order backlog dropped for the sixth quarter in a row, down to 5.1 production months. The order backlog of consumer goods producers also continued to shrink, falling 0.4 production months year on year, down to 2.4 production months. Persistent falling demand is steadily eating away the order backlogs of industrial enterprises across all sectors.

According to figures from the Federal Statistical Office, the order backlog in the manufacturing sector was 0.2 percent smaller in June 2024 compared to the previous month and following calendar and seasonal adjustment. Year on year, the order backlog was all of 6.2 percent lower. While the backlog of orders from at home decreased 4.4 percent year on year, the backlog of orders from abroad was down by a considerably larger 7.2 percent.

Industrial production remains weak throughout spring

In June 2024, industrial production (excluding energy and construction) increased by 1.4 percent compared to the previous month. This positive result was not enough to make up for the poor performance in the two preceding months. Overall, production in the second quarter 2024 was one percent lower than in the first quarter following seasonal and calendar adjustment. In the first quarter, output had increased by 0.3 percent but was still 5.2 percent down year on year. Energy production was down on the first quarter by 1.2 percent following seasonal and calendar adjustment. Year on year, production here was also down by 1.2 percent.

In the construction sector, output was 2.7 percent down quarter on quarter following seasonal and calendar adjustment. This was largely due to the favourable weather conditions at the start of the year making for a strong first quarter result. Year on year, construction activity was five percent lower in the second quarter 2024.

Production was downward across all main industrial groups. Producers of intermediates saw production drop 1.2 percent quarter on quarter following seasonal and calendar adjustment, after recording an increase of 1.4 percent in the first quarter of the year. Year on year, production was

Production development in the manufacturing industry

Sources: Federal Statistical Office, own calculations

Production, manufacturing year on year change in percent 2023 2024 Q4 Q1 Q2 Apr May Jun seasonally and calendar adjusted year on year change in percent 2022 2023 2023 2024 year Q4 Q1 Q2 original value calendar adjusted

down by a much more pronounced 4.7 percent. Capital goods production also dropped 1.2 percent quarter on quarter. Compared to the previous year, production was down by as much as 6.8 percent. Consumer goods producers reduced their production by 0.4 percent quarter on quarter and 2.2 percent year on year.

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

Tangible downward trend in capacity utilisation

The utilisation of production capacities in the manufacturing sector was down by a considerable 2.6 percentage points at the start of the third quarter. This represents the fifth biggest drop since the beginning of the data series in 1991. According to ifo Institute figures, industrial capacity utilisation stood at 77.5 percent at the start of the second half of the year. This is 6.6 percentage points lower than on average over the last ten years. In the same period, capacity utilisation in manufacturing excluding food dropped by a more substantial 3.1 percentage points, down to 77.1 percent which is 7.1 percentage points lower than the long-term average.

Capacity utilisation is trending negatively across almost all industries. The steepest year on year drop in capacity utilisation was recorded by producers of data processing equipment (down eleven percentage points), followed by machinery manufacturing (down 9.4 percentage points) and the producers of motor vehicles and vehicle components who recorded a decrease in capacity utilisation of 8.6 percentage points. Above-average declines in capacity utilisation year on year were also recorded by producers of furniture, producers of electrical equipment and the pharmaceutical industry. Capacity utilisation in textiles and chemicals, already at a low level, barely budged. Capacity utilisation was only upward slightly among producers of food, beverages and tobacco.

Highly divergent trends in revenue

In the second quarter 2024, manufacturing sector revenue was 3.2 percent down year on year in nominal terms, following on from a drop of 6.4 percent in the previous quarter. In the first six months of 2024, revenue was thus 4.8 percent lower than in the same period last year. Among the individual industries, the largest falls in revenue in the first six months of the year were recorded by the electro industry (down 9.8 percent) and the metal industry (down 8.9 percent). The energy-intensive industries, non-metallic minerals and paper, saw revenue contract above average. The downward

Manufacturing revenue* (first half year 2024)

Other transport equipment production

Pharmaceuticals

Machinery

Textiles, fashion, leather

*Change in percent, year on year

Source: Federal Statistical Office

trend in revenue was only slightly more pronounced than the overall average among the heavyweight industries vehicle production (down 4.7 percent) and machinery manufacturing (down 3.7 percent). The only industries that bucked the overall downward trend in revenue were pharmaceuticals (up 0.6 percent) and other transport equipment (up 3.2 percent).

Following price adjustment, revenue in the manufacturing sector in the second quarter 2024 dropped 1.4 percent compared to the previous quarter following seasonal adjustment, after decreasing 0.4 percent in the first quarter. Year on year, revenue was down 4.7 percent. Looking at the origin of revenue, sales from at home dropped 5.9 percent in the second quarter compared to the previous year while revenue from abroad was down by a more moderate 3.4 percent. Sales from the euro area dropped 3.1 percent, less pronounced than the decrease in revenue from third countries (down 3.7 percent). Compared to the fourth quarter 2019, the last quarter before the outbreak of the pandemic, revenue was 6.9 percent lower. While domestic sales were a substantial 11.2 percent lower than their pre-crisis level, sales from abroad were only 2.6 percent below their pre-crisis level.

Manufacturing output downward for the third consecutive year

Last year, the high backlog of orders was still propping up industrial output levels. In the second half of 2023, production nonetheless lost steam substantially on account of low demand. Industry thus started out the year with a negative carryover of more than three percent.

Manufacturing output* by industry (January till June 2024)

Other transport equipment production

*real, change in percent, year on year

Source: Federal Statistical Office

In its forecast for industrial production from April 2024, the BDI had factored in an economic recovery in the course of the year which has so far failed to materialise. In the first six months of

the year, industrial production was 5.8 percent lower than in the same period last year. Even if production figures for the second half of the year improve on account of the weak figures from the second half of last year, we now believe that our forecast drop in production of 1.5 percent is no longer realistic and must be downwardly revised. As things stand, we now anticipate production to decrease by three percent in 2024 overall.

Ifo business climate: German industry downcast

Sentiment within German industry is continuing to deteriorate. In August, the ifo business climate index for Germany dropped for the fourth time in a row. The surveyed companies were less satisfied with current business and also largely pessimistic about their prospects for the next few months. Sentiment is rock bottom in almost all sectors. Among service providers, prospects for the next six months have become noticeably gloomier. The current situation was also rated as slightly worse. In contrast, sentiment in wholesale and retail has improved somewhat following two downward months. While retailers and wholesalers remain unsatisfied with current business, they were slightly less pessimistic about the next six months. In mainstream construction, sentiment remained unchanged. Although companies rated current business as slightly improved, they were also slightly more negative about their future prospects. In the manufacturing sector,

Source: ifo Institut

the business climate index fell to its lowest level since June 2020. Companies were considerably less satisfied with current business and the rating for the next six months reached its lowest level since February. Companies are once again reporting dwindling order backlogs. Capital goods producers are the hardest hit. The ifo economic barometer is therefore still in the recession quadrant. Export prospects for industry deteriorated for the third consecutive month in August and

have been rated as negative by the majority of companies since May last year. According to the ifo Institute, bottlenecks in material supplies and capacities are hardly causing problems any longer. Instead, almost every second company reported a shortage of orders, up from every third company only one year ago.

Outlook

After surviving the winter half-year without slipping into a technical recession and even notching up slight growth at the start of the year, the German economy seemed to be slowly getting into gear. The ifo business climate index climbed three times in a row in the spring and the European football championships were about to start. However, after the days of the Ice Saints in mid-May, sentiment cooled off. Initially, sentiment only turned down slightly in the economy overall before taking a deep plunge in industry from June onwards. The German economy has once again fallen into a state of shock-induced paralysis, moving steadily sideways for a good three years now, steadfastly failing to shrug off the marks left by the Covid pandemic and subsequent energy crisis.

The tangible upturn in private consumption we forecast for the first six months of the year has not materialised. The purchasing power of the workforce did increase on account of the recent high nominal wage agreements and decreasing inflation. According to the calculations of the Federal Statistical Office, real wages increased by over three percent in the second quarter 2024, which is the fifth quarterly increase in a row. Consumers are nonetheless still reluctant to spend. The HDE consumption barometer has been downward for three months in a row since July. The consumer climate index published by the consumer research company GfK painted a similar picture. Although the economic and income prospects of consumers have most recently remained in positive territory, the willingness to make acquisitions has tailed off tangibly with the tendency to save money on the rise. The consumer climate has consequently clouded over further. We do not expect the consumption reticence of consumers to deteriorate much more in the second half of the year but are still downwardly revising our growth forecast for private consumption, down to an rise of 0.6 percent in real terms. Our forecast for state consumption expenditure needs to be upwardly revised on account of the development shown over the first six months of the year. We now expect to see an increase of 1.5 percent in real terms here. This would result in an increase in consumption expenditure overall of 0.9 percent.

Subdued domestic demand and weak exports were the major factors propelling the drop in investment in plant and equipment of more than five percent recorded in the first half of the year. This weak level of investment is set to persist for some time yet, in our opinion. Furthermore, the central banks will need to cut interest rates further to tangibly improve the investment climate. We no longer think that the pick-up in investment anticipated by us for the second half of the year will actually set in before the year is out. On account of the course of the year so far, the high level of uncertainty and the continued depressed sentiment in the corporate sector, we expect investment in plant and equipment to drop by six percent compared to the previous year. The high financing costs are also continuing to weigh down investment in construction projects. Construction investment fell by around four percent in the first six months of the year compared to the same period last year. Investment in residential construction took an even steeper plunge of five percent. The weak level of investment in residential construction is likely to continue for some time to come. Building permits are still trending downwards and are currently more than 30 percent lower than in the fourth quarter 2021, when the European Central Bank

initiated the interest rate turnaround. The downward trend in investment in public and commercial construction is slightly flatter as these segments benefited from tangible momentum in road, rail and pipeline construction. The course of the year so far in construction has been much as we expected so we are sticking to our growth forecast for construction investment of minus 3.5 percent this year. However, due to the major revisions made by the Federal Statistical Office, we need to adjust our forecast for the development of investment in other assets (software, research and development). In view of the course of the first six months of the year, we expect investment here to increase by four percent in 2024 overall. All in all, gross fixed capital formation is set to drop by 2.9 percent compared to the previous year.

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

German foreign trade has not yet recovered from its weak performance in 2023, with exports continuing to drop in the first six months of 2024 year on year after price adjustment. To compensate the negative carryover from the previous year, exports would have to rise considerably in the second half of the year. This is not on the cards currently. According to the ifo Institute, export prospects for the manufacturing sector have continued to decline. We therefore expect exports of goods and services to decrease by 0.5 percent this year overall. Imports are also set to point down and decrease 1.5 percent due to the lower demand for intermediates and weak domestic demand. All in all, we expect

Germany’s gross domestic product to increase by 0.3 percent compared to the previous year in real terms.

Imprint

Federation of German Industries (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 III / 2024“, as of 5 September 2024

Basic data for national accounts

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

Source: Federal Statistical Office

Quarterly Report Germany III/2024: Economic lull persists