Commentary Directory

Dismal Economic Data Out of Germany

Jacob Hess
August 25, 2023

The German economic struggles are more clear-cut than ever after another round of data showed stagnation last quarter and now points to further sluggishness in the third quarter. Since the pandemic ended and gave way to an energy crisis in Europe, Germany has limped forward toward normalcy with a crippled industrial sector and sharply higher consumer prices. Now, it faces a new set of headwinds in the form of higher borrowing costs and tighter financial conditions as a result of the ECB’s unprecedented hiking cycle. The effects of those headwinds are making themselves known in 2023.

German GDP growth has suffered greatly in the first half of the year unlike the first half of 2022 which included a quarter with a 1.0% QoQ expansion in Q1 2022. The latest report from Destatis confirmed that Q2 2023 GDP growth was nonexistent following a slight contraction in GDP in Q1 2023 of -0.1% QoQ. Household consumption was also nonexistent following two quarters of declines in spending, and the government provided very little help with just 0.1% QoQ growth in the quarter. Gross capital formation was the segment with the strongest gain, 2.1% QoQ, but the underlying details of the increase are weak. A strong deterioration in -1.7% QoQ in Q1 set up Q2 with a low base where an 0.4% QoQ recovery in inventories could make a substantial contribution. All of that was offset by a decline in net exports of -0.6% QoQ where exports fell -1.1% QoQ and imports were unchanged.

From Destatis

The industry breakdown of growth suggests that the last bit of momentum that was in the service sector has fallen away. Major services industries such as trade, transport, accommodation and food services (-1.4% QoQ), financial and insurance activities (-2.1% QoQ), and business services (0.0% QoQ) all combined to be a drag on Q2 growth as contractions accelerated in each area. In 2022, the dynamics in these service sectors were much healthier as there was still some lingering demand from the post-pandemic lifting of restrictions. As that fades away and consumers’ excess purchasing power is eroded by the cost-of-living trends in the past two years, sticky services inflation will continue to construct the sector’s growth prospects. There is no help from the industrial sector of Germany as that segment fell -0.6% QoQ in Q2, the third straight contraction.

The latest data paints an even worse picture of the German economy in the current quarter. The first was a very weak Flash PMI of 44.7 for the month of August which is the lowest in 39 months. This included a Flash Manufacturing PMI Output Index at a 39-month low of 39.7, and a Flash Services PMI where the Business Activity Index indicated the sharpest rate of decline since November 2022. The most recent ifo Business Climate Survey compounded the pain. The headline Business Climate Germany index fell to the lowest since October 2022 at 85.7. The notable movements within that index were the manufacturing subindex falling to the lowest since October 2020 (-16.6), and the services sector subindex turning negative for the first time this year (-4.2).

From ifo

According to the ifo Business Cycle Clock, Germany’s economy is nearing the crisis levels last seen during the early pandemic months. There does not appear to be a way out of this black hole in the near term. Headwinds from tighter financial conditions and the lingering conflict in Ukraine are not going away soon. An economically weak China and a belligerent Russia were two stable trading partners before the pandemic, and they have been compromised (albeit in different ways). Domestically, the gradual easing of inflation is a headwind for consumers, and a soft industrial underbelly is further bad news. All roads are pointing to further weakness in Europe’s largest economy and the real possibility of a recession.