Robust recovery in the German economy

“The recovery of the German economy, which began in spring, continued at a faster pace in the third quarter of 2021,” the Bundesbank writes in its Monthly Report. Particularly strong growth was reported for private consumption and services. “Overall, economic output is likely to be have risen more steeply in the third quarter than in the spring,” the experts note, with a 1.6% increase on the first quarter having been recorded at that time. However, in the summer it is unlikely to have yet returned to the pre-crisis levels of the fourth quarter of 2019 due to the supply-side problems in industry.

Supply bottlenecks hold back production

According to the Bundesbank, bottlenecks in the supply of intermediate goods persisted in industry. “As a result, the output level continued to lag considerably behind the strong demand,” write the economists. Industrial output rose again in July for the first time in four months, but this was probably mainly due to the timing of the summer holidays. Industrial new orders in July posted a steep rise on the quarter after seasonal adjustment (+5¼%), in particular on the back of large orders. Demand for German industrial products in July exceeded the pre-crisis level of the fourth quarter of 2019 by a hefty 18%. By contrast, industrial output was 3½% down on its pre-crisis level, according to the Bundesbank’s experts.

Employment up strongly

“There has been exceptionally robust recovery in the labour market since June,” according to the Monthly Report. The seasonally adjusted number of persons in work went up by 100,000 in July, following a similarly strong increase in June. In particular, jobs subject to social security contributions were filled in June, meaning that the number of persons in this type of employment already exceeded its pre-crisis level. Cyclical short-time working also sank rapidly; the proportion of employees subject to social security contributions in cyclical short-time work declined to below 5% in June, thus hitting its lowest level since the beginning of the pandemic. With registered unemployment down by 53,000 persons on the month in August, the unemployment rate dropped to 5.5% in seasonally adjusted terms. In the Bundesbank’s estimation, unemployment is likely to continue to fall strongly in the next three months.

Consumer prices continue to increase significantly

“At 0.2%, the seasonally adjusted rise in consumer prices, as measured by the Harmonised Index of Consumer Prices (HICP), was no longer quite as steep as in the previous months,” the Bundesbank writes. This is due to the fact that price increases for energy, food and non-energy industrial goods tailed off. By contrast, the steep upward pressure on prices for services continued. Compared with the previous year, annual HICP inflation climbed from 3.1% to 3.4% and excluding energy and food from 1.8% to 2.1%. “As things currently stand, rates of between 4% and 5% could be seen temporarily from September until the end of the year,” write the economists. One reason for this is the base effect of the temporary VAT cut in 2020. The experts expect inflation to ease markedly at the beginning of 2022 but that it will still persist at more than 2% up to the middle of the year.