Real gross domestic product (GDP) is likely to have contracted somewhat in the third quarter of 2023, according to the latest Monthly Report. Continued weak foreign demand for industrial products was one of several factors dragging on the German economy. In addition, higher financing costs slowed investment, which depressed domestic demand in the construction sector, especially, but also in industry. Only some of this was cushioned by the existing order backlog, the economists report. Although industrial output in August went up slightly on the month in seasonally adjusted terms, averaged over July and August it was down significantly on the quarter. Production of motor vehicles saw a particularly steep drop. According to surveys by the ifo Institute, the automotive sector complained of persistent bottlenecks in the supply of intermediate goods and, increasingly, a lack of demand. The latter also applied to industry as a whole.

Output in main construction sector declining significantly

Increased financing costs and high construction costs have been pushing down demand for construction work for some time now – especially in housing construction. At last report, the number of building permits was considerably lower than its peak in the first quarter of 2022. New orders in the main construction sector in July were also well below their last peak in the fourth quarter of 2021. However, they had already gone back up to a level significantly higher than the last trough in the first quarter of 2023. According to ifo Institute surveys, firms in the main construction sector are nevertheless increasingly battling with a lack of orders and order cancellations, the Monthly Report states.

Weak sales in retail and the hotel and restaurant sector

Tailwinds for the German economy came from the still robust labour market and steep wage increases amidst subsiding inflation, the economists report. However, weak real sales in retail and in the hotel and restaurant sector indicate that households were not yet using their additional resources for higher consumption expenditure, but were saving instead. This was also reflected in surveys conducted by the market research institution GfK, according to the economists. The weakness of industry and private consumption also weighed on many services sectors.

Barely any rise in unemployment

As in recent months, the labour market is having a stabilising effect on the German economy, the Bundesbank’s economists write. Despite the gloominess when it comes to short-term recruitment plans, employment in August rose by 35,000 persons compared with July. In particular, more people are likely to have been recruited in sectors such as health and social services, training and education, the public sector, and energy and water supply. A less positive picture was painted, according to the Bundesbank, in sectors that are more exposed to cyclical influences, such as manufacturing, construction, logistics and trade.

Inflation rate down markedly – mainly with lapsing of previously bolstering effects

Consumer prices as measured by the Harmonised Index of Consumer Prices (HICP) increased in September by a seasonally adjusted 0.3% on the month. Energy and food prices rose moderately, while services prices continued to see above average growth. Compared with the previous year, the HICP rate fell markedly from 6.4% in August to 4.3%. However, around 1¾ percentage points are attributable to the elimination of effects that had previously pushed the rate up, for example owing to temporary policy measures such as the fuel rebate and the “€9 ticket” implemented last year. The economists conclude that inflation should cool a little further overall in the coming months.