It [the German economy] remains stuck in the period of weakness that has persisted since mid-2022, the economists write in the latest Monthly Report. Real gross domestic product (GDP) is thus likely to have contracted again somewhat in the third quarter of 2024. In the fourth quarter of 2024, economic activity could - from today’s perspective - more or less stagnate. However, the authors of the article are currently still not expecting a recession in the sense of a significant, broad-based and persistent decline in economic output.

Ongoing competitiveness issues

Taking the average of July and August 2024, output was down markedly in both the industrial sector and in construction compared with the second quarter. Demand remains weak in both sectors, according to the Monthly Report. This is attributable, on the one hand, to the comparatively high financing costs, which dampen investment activity and thus also demand for capital goods. Furthermore, uncertainty with regard to future economic and political conditions affects the planning certainty of enterprises, which, in turn, weighs on investment.

Foreign demand for German industrial products is currently recovering only slightly, despite moderate growth in German sales markets. The economists write that this is an indication of ongoing problems in German competitiveness. As a result, both domestic and foreign demand for German industrial products remains weak. The consequently now low level of capacity utilisation in the manufacturing sector is, in turn, taking its toll on the respective investment.

Service providers are likely to have provided support to the economy, albeit to a limited extent. Private consumption is likely to have provided only little impetus. Consumers are still unsettled, according to the Bank’s experts. As wages are rising significantly more strongly than prices, their real incomes are increasing. However, they are still hesitant to make use of this additional scope for expenditure.

Labour market remains relatively stable

The labour market outlook is relatively stable, according to the Monthly Report. Unfavourable economic developments are beginning to have an impact, however. Those areas of the manufacturing and retail trade that are particularly affected by weak demand are increasingly reducing staff. The production sector includes mining, manufacturing and construction, amongst others. On the other hand, substantial recruitment can be observed in healthcare and social services, education, logistics and, most recently, also in the financial sector. Unemployment was up again somewhat in September overall. After seasonal adjustment, around 2.82 million people were registered as unemployed, 17,000 more than in August. The unemployment rate held steady at 6.0% due to rounding. The economists do not expect a significant decline in employment levels at the current time.

Higher inflation rates expected again

The inflation rate in Germany continued to decline in September. Inflation as measured by the Harmonised Index of Consumer Prices (HICP) stood at +1.8%, down from 2.0% in August. Energy prices, in particular, fell substantially once again in September. Inflation rates for food and industrial goods (excluding energy) were largely unchanged from the previous month. Price dynamics for services remained high.

The inflation rate is likely to be higher again towards the end of the year. The economists write that this is due, amongst other things, to energy base effects. Crude oil prices peaked in September of last year and then fell again. One year later, this development, when viewed in isolation, will contribute to an increase in headline HICP inflation over the coming months. Food price inflation could rise again as well.