German Economy Begins to Recover, according to Monthly Report

The German economy is expected to have seen a slight increase in the second quarter of 2023, according to the monthly report. The previously declining private consumption stabilized, aided by the strong state of the labor market, significant wage increases, and a lack of further price increases. Experts believe that these factors have also benefited the service sectors.

However, the industrial and construction sectors were unable to expand their production compared to the previous quarter, despite benefiting from diminishing supply chain issues and a high order backlog. Increased financing costs dampened domestic demand in both sectors. Additionally, a decline in foreign demand slowed down the industrial sector. According to surveys conducted by the ifo Institute, business sentiment deteriorated significantly in June. As a result, the economic recovery in the remainder of the year may be slightly more hesitant than initially forecasted in June.

Stabilization of Private Consumption Private consumption is likely to have stabilized during the spring, as reported by the Bundesbank. The Gfk Consumer Climate, which reflects the current consumer sentiment among German households, improved, particularly in terms of income expectations. In retail, inflation-adjusted sales increased again in May. Private households are also believed to have spent considerably more on travel, while purchases of cars decreased significantly, according to the monthly report. Service providers also benefitted from the improved consumer climate, with their production increasing notably in April compared to the previous quarter. Business conditions in the sector also improved significantly in the second quarter, as indicated by surveys conducted by the ifo Institute.

Robust Labor Market Despite weak economic development, the labor market remained stable. However, the significant increase in employment seen in previous months came to a halt in May, according to experts. The number of occupied positions stagnated in most sectors, and there were fewer individuals with social security contributions in sectors such as trade and temporary employment, which were affected by households’ cautious purchasing behavior. The ifo Employment Barometer remained largely unchanged in June compared to the previous month, while the corresponding early indicator from the Institute for Employment Research (IAN) declined. Therefore, the monthly report suggests that employment growth should not be expected in the coming months.

Registered unemployment rose significantly by 28,000 to 2.61 million people in June, according to seasonally adjusted figures. The corresponding unemployment rate increased by 0.1 percentage points to 5.7 percent. Due to the slow economic recovery, the discontinuation of labor market policy measures, and integration courses, experts anticipate a further increase in unemployment in the coming months.

Inflation Rate Increases due to Special Effect In June, the Harmonized Index of Consumer Prices (HICP) rose by 0.5 percent compared to the previous month, remaining almost as strong as in most previous months. “While energy prices remained virtually unchanged, and food prices increased less strongly than in the previous month,” states the monthly report. However, the price increase for industrial goods excluding energy and services remained above average.

Compared to the previous year, the HICP rate increased noticeably from 6.3 percent to 6.8 percent, which experts attribute to a special effect resulting from the temporary introduction of fuel discounts and the “Nine-Euro-Ticket” in June 2022. From September onwards, these special effects are expected to have a dampening effect, leading to a decline in Germany’s inflation rate. Additionally, the Bundesbank expects recent price decreases in intermediate goods to gradually be passed on to consumers. However, the core rate excluding energy and food is expected to remain high throughout the summer, particularly due to the increased weight of package holidays since the COVID-19 pandemic and their traditionally higher prices during the summer season.

https://www.bundesbank.de/de/aufgaben/themen/monatsbericht-deutsche-wirtschaft-beginnt-sich-zu-erholen-856142


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