German Market Intelligence

February 2024

• After weak economic growth at the end of 2023 with a decline in real GDP of 0.3 per cent, current leading indicators do not yet point to a recovery at the beginning of the year. The mood among consumers has recently deteriorated again. Negative factors such as weak foreign demand, strikes in public transport, high levels of sick leave among employees and geopolitical tensions resulting in supply chain delays could lead to a further delay in the expected economic recovery.
• Output in the goods-producing sector fell by 1.6% in December as compared to the previous month, resulting in another noticeable dip at the end of the year. Output declined in both industry and the construction sector (-1.5% and -3.4% respectively). In contrast, the energy sector again registered a strong increase (+4.1%). New manufacturing orders increased markedly in December compared to the preceding month (+8.9%), following stagnation in November (0.0%) and a noticeable decrease in October (-3.8%). However, the two-month comparison shows that new orders in December were once again characterised by fluctuations in the number of large orders; excluding these, industrial orders fell by 2.2%.
• After falling by 0.8% in November, real retail sales excluding motor vehicles declined further by -1.6% in December. Year-on-year, the retail sector experienced a real sales decline of 1.8% in December. The leading indicators for the future development of consumer spending currently present a mixed picture:
• The inflation rate stood at 2.9% in January: that is the lowest level since June 2021. In December, the rate was noticeably higher (3.7%), which was largely due to a base effect caused by the immediate assistancein December 2022. This base effect no longer had an impact in January 2024, meaning that the previous year’s rate fell noticeably – even though the cap on energy prices expired and the carbon price increased.
• The labour market developed a bit more favourably at the beginning of the year owing to mild weather. Seasonally adjusted unemployment fell by 2,000 people in January. The labour market saw an increase in employment in December and jobs subject to social insurance contributions also rose slightly in November. The leading indicators provided a mixed picture in January: while the number of reported jobs stagnated, the IAB labour market barometer improved and pointed to more favourable employment prospects.
• The Halle Institute for Economic Research’s Bankruptcy Update for January 2024 showed an almost unchanged figure compared to the previous month. The institute assumes that the number of corporate insolvencies will continue to rise in the coming months.
   

January 2024

• The phase of economic weakness continued at the turn of the year. Gross domestic product (GDP) fell by 1⁄4 % at the end of 2023 after price, seasonal and calendar adjustments and current leading indicators do not suggest a rapid economic recovery as yet. However, the downward trend in inflation, rising real wages and the gradual recovery in the global economy will help reduce some of the main burdens for the German economy over the course of this year. This will spur a recovery driven primarily by the domestic economy.
• Output in the goods-producing sector continued to decline in November and was down 0.7%. There were further declines in industry and construction (-0.5 % and -2.9 % respectively), while the energy sector once again reported a significant increase (+3.9 %). While there have recently been signs of domestic orders starting to stabilise in key areas, weak foreign demand, particularly from the eurozone, continues to restrain industrial activity. The industrial economy is not expected to recover until later in the year, when the domestic economy and exports pick up again.
• Real retail sales excluding motor vehicles fell noticeably by 2.2% in November compared with the previous month, after a marked rise in October (+1.3 %). Compared with the same month a year ago, the retail sector experienced a real sales decline of 2.0% in November. Leading indicators currently present a mixed picture: while private consumer sentiment is tending to improve, the business situation in the retail sector is rated as rather unsatisfactory according to surveys conducted by ifo and the HDE trade association.
• The inflation rate is expected to have totalled 3.7% in December, compared to 3.2% in November. The main reason for this was a base effect due to the so-called December Immediate Assistance provided at the end of 2022. At the beginning of this year, the inflation trend is likely to be influenced by tax and fiscal measures. However, inflation-reducing factors (falling producer and import prices, the ECB’s tight monetary policy, appropriate wage settlements and normalisation of profit margins) will continue to dominate the development during the rest of the year.
• The trend on the labour market showed the usual seasonal development at the end of the year. Unemployment rose in unadjusted figures as usual in December; adjusted for seasonal fluctuations, there was a slight increase of 5,000 people. Employment continued to trend upwards in November. Leading indicators improved across the board, but do not yet point to a fundamental reversal of the trend.
• According to final figures, the number of insolvency filings fell by 4.9% in October 2023 (1,481) compared to the previous month. Compared to the same month last year, there was an increase of 19.0%. Corporate insolvencies are still slightly below the pre-Covid level.
   

December 2023

• After a fall in GDP in the third quarter, current economic indicators suggest that economic growth will continue to be weak throughout the fourth quarter. The previously positive investment trend in particular is likely to weaken perceptibly, whilst consumer spending is likely to stabilise as real wages are rising once again. The latest indicators of sentiment among companies and households suggest a slightly more positive outlook for the coming year.
• Output in the manufacturing sector fell by 0.4% between September and October, continuing the downward trend observed since the summer. In October, industrial output decreased by 0.5% and construction sector output by 2.2%. The energy sector, however, registered an impressive increase of 7.1% after decreases in the previous two months. Whilst the latest figures for new orders do not yet reflect a permanent reversal of this trend, current indicators of sentiment suggest a bottoming-out, making a stabilisation of industrial activity likely.
• Real retail sales excluding motor vehicles rose by 1.1% in October compared with the previous month, after a stagnation in September (-0.1%). The number of new registrations of passenger cars by private owners decreased by 3.2% in November, following a strong rise (of +9.1%) in October. Most recently, the leading indicators for consumer spending have suggested a rather restrained development: however, rising wages and falling inflation rates are likely to lead to a stabilisation.
• In November, the rate of inflation was 3.2%. That is the lowest level since June 2021. Year-on-year, food prices again rose at a disproportionately high rate (+5.5%) in November, although inflation continued to ease here too (October: +6.1%). Energy prices compared to the same month in the preceding year fell for the second time since January 2021 (-4.5%). Last year’s measures to curb prices are likely to lead to a temporary rise in inflation rates in the coming months, as the result of changes in the reference figure.
• The weak development of the labour market continued in November. Seasonally adjusted unemployment increased by 22,000 people. Seasonally adjusted employment rose slightly in October (+15,000). Early indicators currently do not suggest a change in this labour market trend. The labour market is not expected to see a sustained improvement unless and until the economy picks up speed next year.
• According to the final figures, the number of companies filing for insolvency in September remained virtually unchanged compared to the previous month and stands at 1,557 (+0.1%). Since June/July, a stabilisation of the number of insolvencies has been observed. However, they are still up by 26.7% compared to the preceding year. The number of corporate insolvencies remains slightly (-4.5%) below the pre-COVID mean value (2016-2019). The number of employees affected by an insolvency remains at a high level too: in September, it was around 91% above the previous year’s figure and 67% above the September mean value of the pre-COVID years (2016-2019). According to the Halle Institute for Economic Research’s Bankruptcy Update, the number of insolvencies decreased by 5.8% in November 2023 compared to the previous month (+20.9% compared to November 2022). The preliminary figure for regular insolvencies filed also slightly declined in November (-1.8%, +18.8% year-on-year).
   

November 2023

• Declining levels of consumer spending and weak foreign demand were the drivers behind the stagnation in the German economy that continued throughout Q3. Even though the overall economic environment is improving – thanks to significantly falling inflation rates, growing real incomes and a slight brightening of business sentiment – the weak statistics from the end of Q3 are putting a burden on the beginning of the last quarter of 2023.
• Industrial output shrank markedly between August and September (-1.7%), whereas construction sector output stagnated (0.0%). New orders in the manufacturing sector saw a slight increase towards the end of the quarter (+0.2%). However, stabilising demand and also the sentiment indicators such as ifo business expectations and the ZEW Indicator of Economic Sentiment suggest that industrial activity may be bottoming out.
• Development in the retail trade remained weak. Real retail turnover (excluding cars) dropped by 0.6% between August and September. However, the combination of rising wages and falling inflation rates means that consumer spending is likely to recover over the coming quarters.
• In October, the inflation rate fell to 3.8% – the lowest level recorded since August 2021. Energy prices fell for the first time since January 2021 (-3.2%), albeit due to a base effect caused by the high level of energy prices in 2022. Prices of foodstuffs continued to rise at a disproportionate rate (+6.1%) in October, but inflation lessened even for these (September: +7.5%).
• The job market continues to be marked by the period of economic weakness, resulting in a low-level autumn recovery. Seasonally adjusted unemployment rose by 30,000 people in October. The labour market is not expected to see a recovery until the spring.
• According to the final figures, the number of companies filing for insolvency in July (1,586) was +2.5% higher than in June (and up +37.4% from July 2022). The trend towards higher insolvency figures that began in mid-2022 is therefore continuing. According to the Halle Institute for Economic Research’s Bankruptcy Update, the number of insolvencies is likely to increase slightly by 2.1% in October compared to September (+43.6% compared to October 2022). For interpretation of these figures, it is important to note that the considerable increases compared to the figures for 2022 are partly due to a base effect: up until mid-2022, filings for insolvency were at a historic low stemming from the temporary suspension of the obligation to file for insolvency and by comprehensive government support measures.
   

October 2023

• The German economy is only emerging slowly from the setbacks caused by the energy price shock, the tighter monetary policy and the global economic softening. This is delaying the generally expected economic recovery. The third quarter is expected to see another slight fall in gross domestic product.
• Industrial output rose slightly between July and August (+0.5%), although both the construction sector (-2.4%) and the energy sector (-6.6%) registered significant declines. The order reserves in the manufacturing sector expanded by 3.9%. The renewed rise in demand and a cautious stabilisation of some indicators of sentiment suggest that industrial output is bottoming out and could pick up speed again at the turn of the year.
• Real retail turnover (excluding cars) dropped by 1.2% between July and August, but at the same time the new registrations of cars by private individuals rose clearly, by 12.1%. Overall, the retail turnover including cars – an important component of consumer spending – was probably up in real terms.
• The rate of inflation fell substantially to 4.5% in September, mainly due to a base effect resulting from the end in September 2022 of the 9-euro public transport ticket and of the tax cut for motor fuel. In view of the declining price pressures at the upstream levels of the economy, the coming months are expected to see a further slow fall-off in inflation.
• The cyclical weakness has meant that the autumn uptick on the labour market has been small. Seasonally adjusted unemployment rose by 10,000 people in September. The leading indicators of the Institute for Labour Market Research and ifo deteriorated significantly. The labour market is not expected to see a recovery until the economy picks up speed in the coming spring.
• Indicators of sentiment (business expectations, purchasing managers index) suggest that the Germany economy could have bottomed out in the third quarter, and will likely pick up speed again around the turn of the year.
   

September 2023

• The latest figures are indicative of a two-pronged economic development. While the domestic economy has slowly picked up as a result of the slight rise in real wages and a continued positive trend in investment activity, foreign demand continues to slow down due to the weakness of the global economy.
• Industry again saw a significant drop in output of 1.8%, whereas output in the construction sector increased by 2.6%. After stabilising in the previous month, the particularly energy-intensive industrial sectors again recorded a decline of 0.6%. Following a strong increase in June (+7.6%), new industrial orders were down sharply in July (-11.7%). However, the decline is primarily attributable to one-off special factors resulting from large-scale orders dating from the previous month. Excluding large-scale orders, orders grew by 0.3%.
• Real retail sales excluding motor vehicles declined slightly again in July (-0.8%). The less volatile three-month comparison, however, still showed an increase of 1.8%. The leading indicators currently still point to restrained growth of consumer spending in the coming months.
• Consumer price inflation continued its downward trend in August. The inflation rate was 6.1% (July: +6.2%), while core inflation remained at 5.5%. Food prices again rose at a disproportionately high rate (+9.0%) compared with the same month a year ago, although upward pressure on prices continued to ease (July: +11.0%).
• The cyclical weakness of the economy is also increasingly affecting the labour market. Unemployment rose noticeably by 18,000 persons in August on a seasonally adjusted basis. The sluggish development of the leading indicators from the Institute for Labour Market Research (IAB) and ifo in August continue to suggest slowing momentum in the labour market. Overall, however, the labour market remains largely stable despite the current economic weakness.
• Current leading indicators, such as order activity and business climate, and also the subdued development of the global economy point to continued weakness in the third quarter; a noticeable economic recovery is not expected until the turn of the year 2023/24 at the earliest.
   

July 2023

• The economic situation in the early summer continues to be characterised by a high level of uncertainty and by data pointing in different directions. Whilst the external economic environment has remained weak, some domestic economic indicators are now pointing towards a stabilisation. Overall, the economic development in the second quarter is likely to have been very restrained.
• The latest data on the economic indicators, particularly on new orders and industrial output, point to a moderate underlying economic performance following a significant cooling towards the end of the first quarter. Although business sentiment has worsened, the current stabilisation of demand is suggestive of a gradual recovery of the industrial economy in the coming months.
• Retail sales (excluding motor vehicles) improved slightly in May compared with the previous month, for the second time in succession. However, consumers continue to be uncertain. Over the coming months, consumer spending is not expected to trigger significant growth in real terms.
• The upward trend in consumer prices picked up some speed again in June, with the inflation rate standing at 6.4% (May: +6.1%). The core inflation rate also rose by 0.4 percentage points to 5.8%. However, following the declining trend since March, this is mainly due to one-off effects relating to the relief provided by the state a year ago (9-euro monthly public transport ticket, reduction in motor fuel duty).
• Whilst the labour market appeared to be unaffected by the difficult cyclical situation for a long time, the situation worsened appreciably in June in the wake of the weaker economic performance. Registered unemployment continued to rise, and employment declined. In view of the ongoing skills shortage, however, no sharp rise in unemployment is likely.
• In April 2023, the number of insolvencies was 14.4% up in year-on-year terms according to official statistics. Current leading indicators are showing a sharp year-on-year rise for June (Halle Institute for Economic Research: 48.1%). According to the institute’s Bankruptcy Update, the number of insolvencies of partnerships and corporations has risen to the highest level since 2016. However, the coming months are expected to see a slight fall. Overall, the trend shows a continuous rise since mid-2022, albeit from a very low level.
• Generally, falling prices on the global energy markets, slowing inflation, higher wage agreements and the expected global economic recovery all point to a moderate recovery of the German economy in the rest of the year.
   

June 2023

• After two consecutive quarters of negative growth in the winter half-year 2022/23, current economic indicators suggest a sluggish start to the second quarter. According to the common definition, it can be said that the German economy was in a "technical recession". The higher energy prices, the weak global economy and less favourable financing conditions are still impacting the economy and delaying the expected economic recovery.
• The underlying cyclical dynamism of the economy has weakened. Industrial output remained virtually unchanged in April after falling sharply by -2.0 per cent in March. New orders fell slightly in April (-0.4 per cent), following a sharp drop in the previous month (-10.9 per cent).
• Following a noticeable decline in retail sales (excluding motor vehicles) in March, retail trade recovered somewhat in April. Consumer sentiment continued to brighten, but only slightly. Overall, consumer sentiment was still at a very low level because high inflation continues to weigh on household spending.
• The upward trend in consumer prices weakened further in May, with the inflation rate standing at 6.1 per cent. The rate of core inflation also declined slightly to 5.4 per cent. It is expected that there will be base effects in the further course of the year as a result of the relief measures taken a year ago to curb price increases. These are likely to temporarily reinforce upward pressure on prices.
• On the labour market, the economic slowdown led to a loss of momentum in the winter half-year. Registered unemployment continued to rise slightly.
• Looking ahead, falling prices on the global energy markets, slowing inflation, higher wage agreements and the expected global economic recovery all point to a moderate recovery of the German economy in the remaining course of the year.
   

May 2023

• The underlying cyclical dynamism has recently weakened noticeably: the latest key indicators show substantial declines, only some of which are likely to have been a reaction to previous increases.
• After two months of positive development, industrial output fell back again in March. In March, new manufacturing orders registered their sharpest decline since the peak of the Covid-19 pandemic in April 2020. Business sentiment, however, brightened for the sixth month in succession.
• Retail turnover (excluding vehicles) fell again in March. Consumer sentiment is expected to continue to recover in the coming months, even though the persisting high rate of inflation remains an issue.
• The rate of inflation dropped to +7.2% in April. The main reason for this slight decline (March: +7.4%) was the diminishing of price pressures on foodstuffs, which were nonetheless much higher than they were a year before.
• The spring recovery of the labour market remains restrained for the time being. Registered unemployment rose somewhat in April in seasonally adjusted terms, though the Easter holidays also played a role here. According to the IAB Job Vacancy Survey, the demand for labour declined somewhat in the first quarter, but still remains at a high level. Gainful employment increased strongly in the first quarter.
• According to the official statistics, the figures for corporate insolvencies in January and February 2023 were around 20% higher than the respective monthly levels for the previous year. Current leading indicators point to a similar trend over the coming months, but currently, the situation is not expected to worsen.
• The current major fluctuations, susceptibility to revisions and the partially contradictory indicator data are not unusual for economic turning points. Following a slow winter season, indicators of sentiment suggest economic recovery over the course of the year.
   

April 2023

• Current economic indicators point to a noticeable upturn in value added in the first quarter of 2023: output in the industrial and building sectors showed a clear upward trend as a result of the further easing of shortages of materials, the significant decline in energy prices and favourable weather conditions.
• Overall, GDP is likely to have risen slightly compared with the previous quarter, thus avoiding a ‘technical recession’. Current forecasts by the German Council of Economic Experts and the joint diagnosis of economic research institutes also predict slightly positive GDP growth for the year as a whole.
• The industrial sector was on the path towards recovery in the first quarter. Both production in the manufacturing sector and new manufacturing orders increased significantly in January and February. The business outlook brightened and fewer companies reported shortages of materials.
• Retail sales (excluding motor vehicles) decreased again in February, after having fallen noticeably in December despite Christmas sales and having remained fairly steady in January. Consumer sentiment is expected to continue its recovery in the coming months, although inflation-related losses in purchasing power continue to weigh on the economy.
• The inflation rate declined to +7.4% in March. A base effect played a major role here. At present, food is the biggest price driver, not only because of its high weight in the basket of goods, but also because food inflation is now higher than that of energy prices.
• The labour market showed robust flat movement in the month of March. The typical spring upturn, however, was comparatively weak. Registered unemployment increased in March in seasonally adjusted terms, but employment also increased strongly. Demand for labour remains at a high level.
   

February 2023

• By the end of 2022, the dynamic development of the German economy slowed noticeably. In the fourth quarter of 2022, GDP declined by 0.2% compared with the previous quarter. The annual figure was revised downward by one tenth to 1.8%. Consumer spending and investment in particular are likely to have developed more weakly in the fourth quarter. Industry continues to struggle with a high level of uncertainty and high energy prices.
• Current indicators support the expected economic slowdown in the winter half-year 2022/23, but suggest that it is likely to be rather limited. Nevertheless, the rise in prices which is putting an increasing burden on consumers, uncertainties about the economic outlook and rising interest rates weighed down on economic activity at the beginning of the year and caused a reluctance to invest.
• According to the ifo surveys, the mood in German business continued to brighten in January. Almost all sectors of the economy were more confident than before. This is a further indication that there will only be a slight recession in the winter.
• Industrial production experienced a setback at the end of the year. While the automotive sector expanded noticeably, output in other sectors such as mechanical engineering fell significantly. However, the downward trend in manufacturing orders seen since February of last year did not continue in December.
• Christmas sales in the retail sector were weak. Retail turnover fell significantly in December compared with the previous month. By contrast, the positive trend in consumer sentiment continued.
• At an expected +8.7%, the inflation rate in January remained clearly below the 10% threshold. The situation at the upstream sales levels has also eased in recent months as a result of falling energy prices.
• The labour market remains tight despite the decrease in economic activity. The increase in employment continued recently, and the number of unemployed fell on a seasonally adjusted basis. Leading indicators point to a rising willingness of companies to recruit staff and a further decline in unemployment.

March 2024

Underlying trends: Economic recovery in Germany stalling

The economic recovery in Germany is stalling. Real gross domestic product (GDP) is likely to decline again slightly in the first quarter. The German economy continues to experience headwinds from various directions. Industry, in particular, is likely to remain sluggish. Orders for domestic industrial goods dropped further in Germany and abroad. Higher financing costs continue to dampen domestic demand, particularly in the area of investment. Heightened economic policy uncertainty is a further drag, especially with regard to the future direction of climate and transformation policy. Enterprises also perceive economic policy framework conditions, such as the growing burden of bureaucracy and regulation, as a barrier. Private consumption is not expected to provide any major stimulus for now, either. Consumers are unsettled and reluctant to spend, even though their scope for spending is generally improving on the back of falling inflation rates and a steep rise in wages. At least the previously very high sickness rate is slowly easing and construction is likely to have been temporarily bolstered by the mild weather in February, although the sector is still navigating choppy waters.  Overall, too, the still depressed survey indicators, such as business expectations as surveyed by the ifo Institute, also currently provide little evidence of an economic recovery for the second quarter.
 

February 2024

Moderate growth in global economy given pronounced regional and sectoral differences

The global economy saw moderate growth in the final quarter of 2023, with regional differences in global activity persisting. In the euro area, economic output stagnated. In China, too, growth remained subdued in view of the ongoing downturn in the real estate market. By contrast, the US economy continued to expand at a brisk pace. Overall, the global economy remained solid in spite of strains such as the still relatively high energy and food prices, the tightening of monetary policy in many regions, heightened geopolitical risks and a variety of structural challenges.

Global industrial output increased moderately in the fourth quarter of 2023, again driven by the emerging market economies. In the advanced economies, by contrast, output has been falling on a trend basis for more than a year, with weak industrial activity in the euro area being a key factor. Imports of goods by advanced economies declined even more sharply. According to business surveys, 2024, too, got off to a subdued start in the industrial sector and global trade. The services sector, on the other hand, appears to be gaining momentum.
 

January 2024

Germany’s real gross domestic product (GDP) probably declined somewhat in the fourth quarter of 2023.1 Foreign orders for the German industrial sector receded further. Higher financing costs continued to dampen investment, particularly in housing construction. Uncertainty about the future direction of fiscal and climate policy is also likely to have weighed on economic activity. Consumers remained cautious. Their consumption expenditure is unlikely to have increased by much, even though their scope for spending probably expanded seeing as the labour market remained robust, inflation came down and wages grew strongly. In addition, economic activity was dampened by unfavourable weather conditions for construction activity and a relatively high sickness rate according to data from company health insurance funds. While the remaining backlog of orders in industry and construction is likely to have had a bolstering effect, output in both sectors dropped substantially. Overall, the economy is currently in slightly weaker shape than expected in the December projection. Signs that foreign demand for industrial goods had already bottomed out were not borne out by the data. In addition, the business climate deteriorated further in January 2024 according to the ifo Institute. However, households’ income situation is improving as expected. All in all, German economic output could be stagnant at best in the first quarter of 2024.2 This would mean a delay in the recovery expected in the December projection.
 

December 2023

Real gross domestic product (GDP) in Germany is likely to decline again slightly in the fourth quarter of 2023, mainly on account of the slowdown in industry and construction. Both sectors had a weak start to the quarter, with output in October significantly lower than the average over the three months preceding. They continue to suffer from weak demand. Order backlogs are acting as less and less of a buffer.  Industrial output is also being depressed by the previous rise in energy prices. Higher financing costs continue to dampen investment, particularly in housing construction. On average across all sectors, firms assessed their business situation averaged over October and November to be somewhat worse still than in the previous quarter, according to the ifo Institute. By contrast, private consumption is likely to be re-covering slowly. In October, for example, households increased their spending in the retail sector and on motor vehicles. Their real disposable income is currently improving as wages continue to rise steeply and inflation moderates. The stable labour market is underpinning this development. At the beginning of next year, the German economy is likely to see slight growth again.

November 2023

Muted economic activity amid declining but still high inflation 

Global economic activity remained divided in the third quarter. Euro area economic growth continued to be sluggish. By contrast, economic growth in the United States and China picked up significantly, driven mainly by buoyant private consumption. This also boosted global economic growth, albeit probably only temporarily. The tightening of monetary policy in many regions of the world, the high energy prices and the specific structural challenges in China continue to be a drag on the global economy.
 

October 2023

Real gross domestic product (GDP) is likely to have contracted somewhat in the third quarter of 2023.1 Several factors dragged on the German economy, such as continued weak foreign demand for industrial products. Higher financing costs also dampened investment. This depressed domestic demand in the industrial sector and, above all, in construction. Only some of this was cushioned by the existing order backlog. Output in industry and the main construction sector therefore declined significantly in the third quarter. Tailwinds for the German economy came from the still robust labour market and steep wage increases amidst subsiding inflation. However, households were probably not yet using their additional scope for spending to increase their consumption. This is signalled by consumption indicators, such as weak real sales in retail and in the hotel and restaurant sector. Furthermore, surveys conducted by the market research institution GfK point to a high propensity to save. The weakness of industry and private consumption also weighed on many services sectors, as indicated by ifo Institute surveys and the S&P Global Purchasing Managers’ Index.
 

September 2023

German economic output will probably contract somewhat in the third quarter of 2023. It is unlikely that private consumption will offer any discernible positive impetus. Households are still reluctant to spend despite the slight easing in price inflation, strong wage growth and favourable labour market. Alongside consumer restraint, economic output is also being depressed by the growing weakness in industry. The further fall in the already low level of new orders and weaker order books are having more and more of an impact on industrial output. Higher financing costs are also likely to be contributing to weak domestic and foreign demand.
 

August 2023

German economy still lacklustre amid persistently high inflation

Global activity subdued

Global activity remained subdued in the second quarter. Private consumption in particular was slow to gain traction because although inflation eased, it was still strong in many places. At the same time, the tighter monetary policy stance in many regions is likely to have been an increasing drag on the global economy. In the euro area, this backdrop meant that it was only thanks to irregular effects that the economy was able to register perceptible growth. Economic activity in the United States, by contrast, remained in comparatively good shape. In China, meanwhile, the recovery set in motion by the end of the zero-COVID policy quickly lost momentum.
 

July 2023

Recovery probably began in second quarter

German economic output is likely to have gone up slightly in the second quarter of 2023. Private consumption, having previously dropped sharply, appears to have stabilised. This was partly due to the fact that the labour market remained in good shape, wages rose sharply and price inflation did not continue to accelerate. The services sectors are also likely to have benefited from this. Furthermore, supply bottlenecks continued to ease. Together with the large backlog of orders, they prevented worse outcomes in industry and construction. Neither of these sectors was able to expand their output compared with the previous quarter. Declining foreign demand curbed industrial activity. Moreover, higher funding costs constrained domestic investment. They also continue to weigh considerably on demand for construction work. According to survey data provided by the ifo Institute, sentiment among businesses grew significantly gloomier in June. Industry, in particular, showed a distinct increase in pessimism. The economic recovery over the remainder of the year could therefore end up being somewhat more tentative than expected in the June projection.1
 

June 2023

Lowest point may have been reached

According to revised data, the German economy continued to contract in the first quarter of 2023,1 which meant that it was in a technical recession in the past winter half-year.2 The decline in real gross domestic product (GDP) in the winter half-year was in line with the expectations expressed in the December 2022 projection.3 However, real gross value added (GVA) saw only a comparatively small decrease overall and even rose sharply in the first quarter.4 GDP is also expected to edge up again slightly in the current quarter, although some strains remain.5 External industrial demand continues to fall and is weighing on output and exports. Higher financing costs are dampening investment, pushing down domestic demand in a number of industrial sectors and in construction. However, supply bottlenecks continue to dwindle in importance and the still very high order backlog is providing support. In addition, despite inflation still being high, households are slowly experiencing more scope for spending again, as inflation is in fact easing and wages are rising steeply. Furthermore, employment is growing. Beneficiaries of this environment are private consumption and service providers, which are likely expanding significantly. Finally, government consumption is expected to pick up again, having fallen sharply in the first quarter due to pandemic-related expenditure petering out.
 

May 2023

Activity stagnating and inflation still too high in Germany. Global economy makes solid start to 2023, outlook rather subdued.

The global economy got off to a solid start in 2023. Stimuli for growth came primarily from China, where real gross domestic product (GDP) rose significantly after the end of the country’s zero-COVID policy. At the same time, economic activity in the euro area picked up again, partly thanks to a distinct easing of the situation in energy markets. Fears of a recession have so far proven unfounded in the United States, too, with moderate economic growth continuing, driven by consumers’ readiness to spend.

Despite the solid start to the year, the global economic environment is likely to remain challenging. While the upturn in China is set to continue at a moderate pace, stubbornly high inflation and tighter monetary policy are putting the brakes on activity in almost all advanced economies. Added to this are risks stemming from the recent turmoil in the banking system, especially in the United States.
 

April 2023

Economic output probably rose again in first quarter

The German economy beat last month’s expectations in the first quarter of 2023, probably increasing its activity again somewhat.1 While persistently high inflation weighed on private consumption and consumer-related service providers, industry saw a stronger recovery than expected. The return to lower energy prices provided direct support for energyintensive production, bottlenecks in the supply of intermediate goods continued to ease and demand picked up again markedly. Output also rose sharply in the main construction sector, although higher construction prices and financing costs continued to dampen demand for construction work considerably. Unlike in industry, it was mainly temporary factors that are likely to have contributed to this increase, especially the mild weather in January and February by normal standards, following December weather that had been unfavourable for construction activity.
 

March 2023

The German economy recovered only slowly at the beginning of 2023 following the broadbased and strong setback in December of last year. Industry and construction saw another sharp increase in output in January, even exceeding the previous quarter’s average, but exports of goods rallied only partially in priceadjusted terms. Moreover, consumer-related sectors continue to suffer from the persistently high inflation and the associated reluctance on the part of consumers. In the retail sector, sales remained at the depressed level of the previous month in price-adjusted terms and were thus significantly below the previous quarter’s average. Although the GfK consumer climate recovered slightly of late, it stayed at a very low level. According to the ifo surveys, the same applies to enterprises’ business expectations, which are still mostly pessimistic despite brightening further in February. The assessment of the business situation even deteriorated somewhat. All in all, German economic activity is likely to fall again in the current quarter. However, the decline is likely to be smaller than in the final quarter of 2022 in which economic output fell by 0.4%, according to revised data published by the Federal Statistical Office.
 

February 2023

Global economy growing moderately amidst improving sentiment

The global economy continued to see only moderate growth in the final quarter of 2022 owing to various headwinds. The main factors behind this slowdown were high inflation rates, the continued tightening of monetary policy in many industrial countries and the European energy crisis triggered by Russia’s war on Ukraine. Accordingly, there was weak economic momentum in the euro area, although it was somewhat stronger than had been expected just a few weeks ago. In the United States, gross domestic product (GDP) rose markedly in the fourth quarter, but the underlying economic momentum also remained subdued. In China, economic growth was initially halted by fresh lockdowns and then by a massive wave of infections after all of the containment measures were suddenly lifted. At the turn of the year, sentiment amongst entrepreneurs and consumers worldwide brightened slightly, with recessionary fears receding somewhat. This is likely to have been helped by the distinct easing of the European energy crisis. Inflationary pressures also relented somewhat. Finally, the end of the zero-COVID policy in China is likely to pave the way for economic recovery.

Issue 3 - 2024

At its meeting on 11 April 2024, the Governing Council decided to keep the three key ECB interest rates unchanged. The incoming information broadly confirmed the Governing Council’s previous assessment of the medium-term inflation outlook. Inflation has continued to fall, led by lower food and goods price inflation. Most measures of underlying inflation are easing, wage growth is gradually moderating, and firms are absorbing part of the rise in labour costs in their profits. Financing conditions remain restrictive and the past interest rate increases continue to weigh on demand, which is helping to push down inflation. But domestic price pressures are strong and are keeping services price inflation high.

The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It considers that the key ECB interest rates are at levels that are making a substantial contribution to the ongoing disinflation process. The Governing Council’s future decisions will ensure that the key ECB interest rates will stay sufficiently restrictive for as long as necessary. If the updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase the Governing Council’s confidence that inflation is converging to its target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction. In any event, the Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction, and it is not pre-committing to a particular rate path.
 

Issue 2 - 2024

At its meeting on 7 March 2024, the Governing Council decided to keep the three key ECB interest rates unchanged. Since its monetary policy meeting on 25 January 2024, inflation has declined further. In the March 2024 ECB staff macroeconomic projections for the euro area, inflation has been revised down, in particular for 2024 which mainly reflects a lower contribution from energy prices. Staff now project inflation to average 2.3% in 2024, 2.0% in 2025 and 1.9% in 2026. The projections for inflation excluding energy and food have also been revised down and average 2.6% for 2024, 2.1% for 2025 and 2.0% for 2026. Although most measures of underlying inflation have eased further, domestic price pressures remain high, in part owing to strong growth in wages. Financing conditions are restrictive and the past interest rate increases continue to weigh on demand, which is helping push down inflation. Staff have revised down their growth projection for 2024 to 0.6%, with economic activity expected to remain subdued in the near term. Thereafter, staff expect the economy to pick up and to grow at 1.5% in 2025 and 1.6% in 2026, supported initially by consumption and later also by investment.
 

Issue 1 - 2024

At its meeting on 25 January 2024, the Governing Council decided to keep the three key ECB interest rates unchanged. The incoming information broadly confirmed its previous assessment of the medium-term inflation outlook. Aside from an energy-related upward base effect on headline inflation, the declining trend in underlying inflation has continued, and the past interest rate increases keep being transmitted forcefully into financing conditions. Tight financing conditions are dampening demand, and this is helping to push down inflation.

The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. Based on its current assessment, the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. The Governing Council’s future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary.

The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, the Governing Council’s interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission
 

Issue 8 - 2023

The Governing Council decided at its meeting on 14 December 2023 to keep the three key ECB interest rates unchanged. While inflation has dropped in recent months, it is likely to pick up again temporarily in the near term.^[1] According to the December 2023 Eurosystem staff macroeconomic projections for the euro area, inflation is expected to decline gradually over the course of 2024, before approaching the Governing Council’s 2% target in 2025. Overall, Eurosystem staff expect headline inflation to average 5.4% in 2023, 2.7% in 2024, 2.1% in 2025 and 1.9% in 2026. Compared with the September 2023 ECB staff macroeconomic projections for the euro area, this amounts to a downward revision for 2023 and especially for 2024.

Underlying inflation has eased further. But domestic price pressures remain elevated, primarily owing to strong growth in unit labour costs. Eurosystem staff expect inflation excluding energy and food to average 5.0% in 2023, 2.7% in 2024, 2.3% in 2025 and 2.1% in 2026.
 

Issue 7 - 2023

The Governing Council decided at its meeting on 26 October 2023 to keep the three key ECB interest rates unchanged. The incoming information has broadly confirmed its previous assessment of the medium-term inflation outlook. Inflation is still expected to stay too high for too long, and domestic price pressures remain strong. At the same time, inflation dropped markedly in September, including due to strong base effects, and most measures of underlying inflation have continued to ease. The Governing Council’s past interest rate increases continue to be transmitted forcefully into financing conditions. This is increasingly dampening demand and thereby helps push down inflation.

The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. Based on its current assessment, the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. The Governing Council’s future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary.
 

Issue 6 - 2023

Inflation continues to decline but is still expected to remain too high for too long. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. In order to reinforce progress towards its target, the Governing Council decided at its meeting on 14 September 2023 to raise the three key ECB interest rates by 25 basis points.

The rate increase reflects the Governing Council’s assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission. The September 2023 ECB staff macroeconomic projections for the euro area see average inflation at 5.6% in 2023, 3.2% in 2024 and 2.1% in 2025. This is an upward revision for 2023 and 2024 and a downward revision for 2025. The upward revision for 2023 and 2024 mainly reflects a higher path for energy prices. Underlying price pressures remain high, even though most indicators have started to ease. ECB staff have slightly revised down the projected path for inflation excluding energy and food, to an average of 5.1% in 2023, 2.9% in 2024 and 2.2% in 2025. The Governing Council’s past interest rate increases continue to be transmitted forcefully. Financing conditions have tightened further and are increasingly dampening demand, which is an important factor in bringing inflation back to target. With the increasing impact of this tightening on domestic demand and the weakening international trade environment, ECB staff have lowered their economic growth projections significantly. They now expect the euro area economy to expand by 0.7% in 2023, 1.0% in 2024 and 1.5% in 2025.
 

Issue 5 - 2023

Inflation continues to decline but is still expected to remain too high for too long. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It therefore decided at its meeting on 27 July 2023 to raise the three key ECB interest rates by 25 basis points.

The rate increase reflects the Governing Council’s assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission. The developments since its meeting on 15 June support the expectation that inflation will drop further over the remainder of 2023 but will stay above target for an extended period. While some measures show signs of easing, underlying inflation remains high overall. The past rate increases continue to be transmitted forcefully: financing conditions have tightened again and are increasingly dampening demand, which is an important factor in bringing inflation back to target.
 

Issue 4 - 2023

Inflation has been coming down but is projected to remain too high for too long. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It therefore decided at its meeting on 15 June 2023 to raise the three key ECB interest rates by 25 basis points.

The rate increase reflects the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission. According to the June 2023 Eurosystem staff macroeconomic projections for the euro area headline inflation is expected to average 5.4% in 2023, 3.0% in 2024 and 2.2% in 2025. Indicators of underlying price pressures remain strong, although some show tentative signs of softening. Staff have revised up their projections for inflation excluding energy and food, especially for this year and next year, owing to past upward surprises and the implications of the robust labour market for the speed of disinflation. They now see it reaching 5.1% in 2023, before it declines to 3.0% in 2024 and 2.3% in 2025. Staff have slightly lowered their economic growth projections for this year and next year. They now expect the economy to grow by 0.9% in 2023, 1.5% in 2024 and 1.6% in 2025.
 

Issue 3 - 2023

The inflation outlook continues to be too high for too long. In light of the ongoing high inflation pressures, the Governing Council decided at its meeting on 4 May 2023 to raise the three key ECB interest rates by 25 basis points. Overall, the incoming information broadly supports the assessment of the medium-term inflation outlook that the Governing Council formed at its previous monetary policy meeting on 16 March. Headline inflation has declined over recent months, but underlying price pressures remain strong. At the same time, the past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain.