German economic output probably grew somewhat more slowly in the second quarter than expected, the Bundesbank writes in its latest Monthly Report. Real gross domestic product (GDP) is likely to have increased only slightly in the second quarter of 2024. According to the Bundesbank, temporary hopes of an end to the weakness in the industrial sector were not realised, as industrial output declined sharply in May. With the exception of manufacturers of motor vehicles and motor vehicle parts, which expanded their production substantially, the decline was broadly based across sectors. Energy-intensive sectors recorded an increase in output, even though the level of production remained significantly below the levels seen before Russia launched its war of aggression against Ukraine. Overall, however, the industrial sector is likely to have slowed economic activity in the second quarter, the report states.

In contrast to this, note the Bundesbank economists, the recovery in the services sector probably continued, buoyed in part by private consumption. While production data for the services sector are only available up to March, sentiment indicators available for the entire second quarter (from the ifo Institute and S&P Global) show that service providers were noticeably more optimistic.

Labour market treading water

“The weak economy, combined with strong immigration, currently means that both employment and unemployment in Germany are rising slightly,” the economists write. However, it was mostly services sectors, such as healthcare and long-term care, education, and energy and water supply, that recruited noticeably more staff. By contrast, the economic stimulus was not sufficient to keep employment in the manufacturing and construction sectors unchanged. According to the report, the total number of persons in employment increased by 20,000 in May in seasonally adjusted terms. At the same time, unemployment rose to 2.78 million people in June, around 18,000 more than in May. The unemployment rate went up slightly to 6.0 %. Looking at the leading indicators, the Bundesbank’s economists expect continued slight employment growth over the next few months and a somewhat slower rise in unemployment.

Inflation rate somewhat lower again in June

The Harmonised Index of Consumer Prices (HICP) rose [in June] by only 0.1 % on the month in seasonally adjusted terms, after 0.2 % in May, the Report reads. While lower energy prices again had a dampening effect, food prices rose significantly and prices for non-energy industrial goods also picked up slightly once more. Looking at the year-on-year figure, headline inflation fell considerably, from 2.8 % in May to 2.5 % in June. The Bundesbank economists expect inflation to fluctuate over the coming months, but consider it unlikely there will be any further downward tendencies.

Bundesbank expects further slight uptick 

According to the Bundesbank economists, economic activity is likely to strengthen somewhat in the third quarter, with private consumption looking set to pick up a little more momentum. Strongly rising wages, subsiding inflation and a robust labour market are likely to continue to buoy consumer sentiment. This assessment also tallies with the expectations of retailers and service providers, with the results of the ifo Institute’s Business Climate Index brightening markedly in June. However, industrial activity is likely to improve only slowly due to weak demand. “As things currently stand, GDP growth in the third quarter, too, could therefore fall short of the expectations expressed in the Bundesbank’s June forecast for Germany,” the authors write.