According to the current issue of the Bundesbank’s Monthly Report, German economic output fell surprisingly significantly in the fourth quarter of 2024. According to the flash estimate of the Federal Statistical Office, seasonally adjusted real gross domestic product (GDP) recorded a quarter-on-quarter decline of 0.2%. Significantly lower exports and weaker industrial output weighed on the economy in particular. The experts state that the latter declined in the fourth quarter, driven by the automotive industry and energy-intensive sectors. Excluding these two areas, production would have increased slightly. A positive development was observed in the production of electrical equipment and data processing equipment, for example, as well as in other transport equipment, which has been expanding for a few years now. 

Industrial output was therefore, according to the report, as yet unable to benefit in the fourth quarter from the stabilisation of new orders. Excluding volatile large orders, new orders have risen slightly since the second quarter. Nonetheless, demand for German industrial products remains weak. The high economic policy uncertainty and now very low capacity utilisation continued to weigh on investment and thus domestic demand for capital goods and construction work. 

Demand, production and investment in the construction sector probably stabilised

According to the experts, construction investment may have stabilised again at the end of the year after two quarters of decline. Output in building construction and civil engineering rose slightly again for the first time since the first quarter, at the very least. In addition, both new orders and building permits recovered somewhat recently. Averaged across October and November, real new orders in the main construction sector, for example, rose markedly overall compared with the previous quarter. Nevertheless, the construction sector as a whole continues to struggle with weak demand. According to the experts, the persistently elevated financing costs are still weighing on the sector, especially in housing construction. 

Private and government consumption on the rise

The report states that private consumption and service providers likely continued to support the economy in the fourth quarter. Private consumption benefited from wage growth, but consumers were still reluctant to make full use of their additional spending leeway. The economists attribute this restraint, not least, to the uncertain labour market outlook. Nevertheless, fourth-quarter indicators painted a positive picture for consumption and consumption-related services. Retail sales and new passenger car registrations rose, and sales in accommodation and food services stabilised.

Labour market stable in fourth quarter

According to the experts, employment remained more stable in the fourth quarter than had been expected following the decline in the third quarter. Overall employment remained at the level of the previous quarter. The decline in employment in the manufacturing sector was offset by hiring in some services sectors. The economists write that short-time work has increased somewhat since the summer holidays. Unemployment has risen slightly. Averaged over the fourth quarter of 2024, a seasonally adjusted 2.86 million persons were registered as unemployed, around 48,000 more than in the third quarter of 2024. 

Inflation rate somewhat higher

Between October and December 2024, the Harmonised Index of Consumer Prices (HICP) rose by an average of 2.5% on the year, following a 2.2% increase in the third quarter. Core inflation (excluding energy and food) increased slightly to 3.2% compared with the previous year.

Averaged over 2024, the inflation rate fell significantly to 2.5%, having come in at 6.0% in 2023. In particular, the upward pressure on goods prices subsided substantially, the report explains. At 2.8%, the rate of inflation for food was close to the historical average in 2024. Inflation for non-energy industrial goods fell to 1.5% and likewise approached the historical average. Only services inflation remained unusually high, at 4.3%. The experts expect the inflation rate to come down over the next few months, before potentially going back up temporarily from the middle of the year. 

German economy could pick up somewhat at beginning of 2025

According to the experts, despite the persistently weak underlying economic conditions, the German economy could pick up slightly in the first quarter of 2025. Industry could be less of a drag than before in the first quarter and construction could remain at roughly the level of the previous quarter. Factors such as high uncertainty, increased financing costs and low capacity utilisation are still weighing on investment. However, demand (as measured by order intake) has recently recovered somewhat in both sectors. Exports may develop less unfavourably, particularly if anticipatory effects occur due to looming US tariffs. Private consumption and, above all, service providers are expected to provide further support for the economy.