German economic activity remained weak in the final quarter of 2019. According to the Federal Statistical Office’s flash estimate, real gross domestic product (GDP) remained unchanged on the quarter after seasonal and calendar adjustment. Looking at the year as a whole, real GDP rose by 0.6%. Industry was the main factor weighing on aggregate output towards the end of the year, the Bundesbank’s economists write in the most recent edition of their Monthly Report. By contrast, the more domestically oriented services sectors continued to buoy economic activity. “The still fairly positive income and labour market prospects for consumers had a substantial part to play in this regard,” the experts explained.

No fundamental cyclical change anticipated in the first quarter of 2020

There are, moreover, still no signs of a fundamental cyclical change in Germany in the first quarter of 2020. Looking at industry, the downward trend in new orders persisted through to the end of 2019, albeit with further diminishing momentum, the economists wrote. However, sentiment in this sector of the economy has improved perceptibly of late. This could be a sign that the downward pressure on industrial output is gradually easing. Nevertheless, there are economic risks in connection with the outbreak of the Coronavirus in the People’s Republic of China.

Marked rise in employment

Unemployment remained largely unchanged at a low level in the final quarter of the year, the Bundesbank’s Monthly Report further stated. On average, 2.28 million people were registered as unemployed in the reporting quarter, unchanged from the previous quarter. Seasonally adjusted employment increased by 81,000 persons, or 0.2%, in the final quarter of 2019. Growth was thus roughly twice as strong as in the previous quarter, the Bundesbank’s economists pointed out. According to the experts, leading indicators for the labour market suggest that employment will continue to rise over the next few months.

Drop in average annual rate of inflation

Consumer prices as measured by the Harmonised Index of Consumer Prices (HICP) rose by 0.3% after seasonal adjustment in the fourth quarter of 2019, the Bundesbank economists explained in the Monthly Report. The price of services, in particular, rose markedly in the period under review, they wrote, while prices for industrial goods excluding energy, too, continued to climb. By contrast, prices for food stagnated and energy prices came down further, they explained. Annual headline HICP inflation rose slightly from 1.0% in the third quarter to 1.2% in the final quarter. Excluding the dampening factors energy and food, it even appreciated steeply from 0.9% to 1.6%.

Averaged across 2019, however, inflation, at 1.4%, was significantly lower than in the previous year. The Bundesbank’s experts attribute this mainly to slower energy price inflation. Excluding the two volatile components energy and food, inflation rose slightly to 1.4% on average.

Lower house price inflation

The sharp rise in prices for residential property in Germany continued in 2019 in slightly moderated form. There was a distinct slowdown in the rate of price increase in German towns and cities, in particular, the Bundesbank’s Monthly Report explained. In the 127 German towns and cities covered by the data, prices had risen by 6% last year, and thus 2¾ percentage points less than the average of the past three years. The upward pressure on house prices weakened particularly significantly in the seven major cities Berlin, Cologne, Düsseldorf, Frankfurt am Main, Hamburg, Munich and Stuttgart. However, the growth rate for Germany as a whole was lower overall, too.

The experts identify as one reason for this development marginally lower demand for housing, which they attribute to slightly less rosy income prospects and the dip in immigration. At the same time, the additional supply of housing did not drop in 2019, they said. Nonetheless, the Bundesbank continues to identify marked price exaggerations in the urban housing markets. “According to current estimates, upward price deviations in the towns and cities were between 15% and 30%,” they wrote.