The German economy continues to be weak. From today’s perspective, real gross domestic product (GDP) could stagnate or decline again somewhat in the third quarter of 2024, according to the current issue of the Bundesbank’s Monthly Report. However, the economists are currently not expecting a recession in the sense of a significant, broad-based and persistent decline in economic output.

Weak domestic demand weighs on industry

In the third quarter, output in the industrial sector and in construction got off to a sluggish start in Germany. The report states that the heightened economic policy uncertainty is weighing on business. Furthermore, higher financing costs are dampening demand for industrial goods and construction work.

Although demand for German industrial products increased somewhat, this was not enough to mitigate the effects of the lack of orders in industry overall. While domestic demand remained weak, euro area countries provided some positive momentum.

Consumers remain cautious about spending

Private consumption is still lacklustre as well. Sentiment indicators and data on new passenger car registrations, for example, suggest that consumers remain cautious about spending. And this is in spite of favourable conditions, with the labour market outlook still relatively stable. In addition, wages are rising significantly more strongly than prices. These developments should impact consumption, at least in the longer term. “At least some of the resulting gains in purchasing power are expected to gradually be reflected in private consumption,” the authors write.

Employment barely rose in July

According to the report, the absence of any economic stimulus is gradually having an impact on both German labour market developments and the outlook. Although the level of employment in Germany is exceptionally high, employment growth has weakened of late. Seasonally adjusted total employment rose by 4,000 persons in July and is hence scarcely higher. The unemployment rate in August remained at 6.0%. Compared with the previous year, unemployment under the cyclically sensitive statutory unemployment insurance scheme increased by 111,000 persons, whereas growth in the number of unemployed receiving the basic welfare allowance was smaller, at 65,000. The authors explain that higher unemployment is primarily a result of the persistent economic weakness. Overall, the labour market outlook is currently still relatively stable.

Higher inflation figures expected again

The inflation rate – measured as the year-on-year percentage change in the Harmonised Index of Consumer Prices (HICP) – fell surprisingly significantly in August to 2.0% from 2.6% in July. However, higher inflation figures are expected again over the coming months. In September, inflation is likely to initially remain at a similarly low level to that seen in August, but subsequently is expected to rise again slowly. This is partly attributable to the significant decline in energy prices last autumn which, taken in isolation, pushes up the inflation rate as a base effect twelve months later.