The Economic Situation in the Federal Republic of Germany in September 2008 [1]

Press release of the Federal Ministry of Economics and Technology

The German economy is experiencing a slowdown. Compared to the first quarter of 2008, gross domestic product (GDP) in the second quarter contracted by 0.5% in price-, calendar- and seasonally adjusted terms. However, this downward movement is in part a technical reaction offsetting the special factors that boosted first-quarter growth, which stood at 1.3% after a slight downward revision. Growth was positive overall for the first half of 2008, up 1.2% (seasonally adjusted) over the second half of 2007. Nevertheless, the underlying trend has grown weaker as Germany's economy increasingly absorbs the negative impacts arising from numerous downside factors that are linked mainly to the global economic environment. It was primarily domestic demand that slowed in the second quarter, falling 1.0% compared to the first quarter in price-, calendar- and seasonally adjusted terms. The decisive factors here were weakening trends in plant and equipment investment and particularly in construction investment, which had benefited strongly from the mild weather during the first quarter. Consumer spending declined as well due to rising prices and generally cautious consumer confidence.

The overall outlook for the economy has continued to worsen, primarily due to the looming slowdown in global economic growth. The acceleration of global inflation, which is being driven by rising raw materials and food prices, is putting a brake on growth worldwide. Furthermore, the crisis on financial markets has intensified once again, and the full extent of its impact remains unforeseen at this time. This turbulence has served to further underscore the downward risks that are currently weighing upon the global economy. Because of the German economy's orientation toward exports and its strong linkages with the world economy, it is hardly possible for it to isolate itself from global economic trends. At the same time, however, it is unlikely to feel the impact of developments on global financial markets as much as other countries, such as the United States. This is due in part to the fact that German companies remain competitive and their finances are largely in good shape. On the favourable side, two bright spots for the economy include the reversal of dramatic price increases on raw materials markets as well as the solid drop in the external value of the euro.

Output in the goods-producing industries is currently encountering noticeable headwinds, contracting by 1.8% over the previous month (in price-, calendar- and seasonally adjusted terms) and thus entering the third quarter with a weak start. Both the industrial and construction sectors are affected by this trend. In July 2008, industrial output fell by 2.0% compared to the previous month (seasonally adjusted). It should be noted, however, that the timing of this year's vacation season had a marked impact on this figure. Nevertheless, the underlying trend appears to point downwards, with the three-month comparison [3] standing at 2.6%. The demand for domestic and imported industrial goods is slipping. New industrial orders have declined, falling in price-, calendar- and seasonally adjusted terms by 1.7% in July and by 4.8% in the three-month comparison. The decline in domestic orders for capital goods - a key indicator of the investment intentions of domestic companies - is particularly steep (three-month comparison: 6.1%). In year-on-year terms, new industrial orders fell overall by 3.3% (unadjusted) during the past three months. The ifo Business Climate Index for the manufacturing industry dipped further in August, particularly with respect to business expectations. In the construction industry, production declined in price-, calendar- and seasonally adjusted terms by 2.0% in July and by 5.6% in the three-month comparison, although this latter figure was affected by weather-related adjustments. Due to ebbing demand and worsening market sentiment, little stimulus is expected from the construction sector in the foreseeable future.

The increase in private household income due to higher employment, wages and salaries has largely been offset by inflation. In the second quarter, consumer spending dropped by 0.7% in price-, calendar- and seasonally adjusted terms, and by 0.1% in current prices, thereby solidifying the impression that consumer sentiment has noticeably worsened. Retail sales (excluding motor vehicles and filling stations) are maintaining their downward trend. In July, retail purchases by consumers fell by 1.0% compared to the previous month in price-, calendar- and seasonally adjusted terms. Motor vehicle sales have also weakened, as the number of vehicle registrations currently falls short of last year's figures. Due to the bleaker economic outlook, both the retail business climate and consumer sentiment have recently declined. Economic stimulus from this area is unlikely until the upward pressure on prices clearly decreases.

Exports have also weakened considerably. In July, exports declined by 1.7% compared to the previous month (seasonally adjusted), and there is an overall tendency toward stagnation. In year-on-year terms, exports rose by 5.8% (unadjusted) during the past three months. In addition, imports demonstrated unusually strong growth in July, up by 7.4% in seasonally adjusted terms. Energy imports in particular rose steeply. In the current three-month comparison, imports are up 9.6% (unadjusted) compared to the same period last year. However, this increase is strongly influenced by the rising prices of imports, which were up 9.3% in July. Despite the decline in the external value of the euro, the overall outlook for the economy has continued to worsen, primarily due to the looming slowdown in global economic growth. The weak development of industrial orders from abroad provides a further indication of this trend. Imports of goods are likely to slow as well. For this reason, foreign trade is not expected to provide any significant stimulus to growth for the time being.

In contrast, the weakening of the economy has had little noticeable impact on the labour market, since developments on the labour market usually lag behind the economic cycle by approximately six months. So far, the positive trends on the labour market are continuing, although the level of dynamism appears to have cooled. After the sluggish spring pick-up, total employment (domestic concept) actually increased again in July, up by 37,000 in seasonally adjusted terms. Nevertheless, this increase was somewhat less solid than the average rise of 45,000 over the past six months. In year-on-year terms, total employment expanded by 560,000 to 40.31 million (unadjusted). This growth is based on the rising number of jobs requiring social insurance contributions, which in June 2008 had increased by 596,000 in year-on-year terms. In August, the number of unemployed persons fell to 3.196 million (unadjusted). The steep decline in unemployment continued, with 40,000 fewer unemployed persons (seasonally adjusted). This drop was even somewhat stronger than the average decline of 37,000 over the past six months. In August, the unemployment rate fell to 7.6%.

There are now a few bright spots with respect to consumer prices. Inflation slowed in August. Compared to July, consumer prices declined by 0.3%. In July, the annual rate of inflation fell from 3.3% to 3.1%. A decisive factor in this trend was the solid decline in heating and transport fuel prices. Other prices declined due to seasonal factors. However, inflation will remain high for the time being. The upward pressure on prices, which is being driven by rising energy and food prices, is unlikely to have already filtered its way through the entire price system. In addition, favourable base effects are not expected to occur until toward the end of the year. After reaching a high of US $145 per barrel in early July, the price of Brent crude oil has dropped steeply, falling to below US $90 per barrel by mid-September. In August, the core inflation rate (i.e. price increases excluding energy and seasonal foods) stood at 1.8%.

Note:
A detailed report and commentary on the overall situation and trends in the German economy will be published in the October edition of the monthly report, Schlaglichter der Wirtschaftspolitik ("Economic policy highlights", in German only). This report will be available on the website of the Federal Ministry of Economics and Technology starting on 22 September 2008.