German economic output rose unexpectedly in the third quarter of 2024, the Bundesbank’s economists write in the Monthly Report. According to the flash estimate of the Federal Statistical Office, seasonally adjusted real gross domestic product (GDP) was up by 0.2% on the previous quarter. However, the economists do not see this increase as evidence of an improved underlying cyclical trend. “Thus, at the current time, none of the key demand components give any cause to expect a marked short-term recovery in the German economy,” the Monthly Report goes on to say. Private consumption benefited from the substantially higher wages in the third quarter. However, consumers were reluctant to use their additional scope for spending, partly because the labour market outlook is becoming increasingly gloomy.

German industry under high pressure to adapt

Industrial output fell sharply in September after seasonal adjustment, and taking the average of the third quarter it was also down significantly on the previous quarter. According to the Monthly Report, the decline is likely to have been driven by the ongoing weakness in demand for German industrial products, in particular. “The industrial sector is faced with a difficult environment and is under high pressure to adapt,” the economists write. Not only does it need to adjust to the longer-term impact of the energy price shock triggered by the Russian war of aggression against Ukraine, but also to cope with numerous other challenges. These include the green transition to carbon-neutral production methods, demographic change and increasing competition in global markets from emerging economies such as China. “The German automotive industry is particularly affected by this structural change,” the report states. The construction sector also continues to struggle with weak demand. Sales data available up to August indicate that housing investment, in particular, decreased further. The still elevated financing costs continued to have a dampening effect here.

Labour market becoming increasingly gloomy

The protracted economic weakness also reached the hitherto very robust labour market in the third quarter, the economists write. Averaged over the third quarter, the seasonally adjusted number of employed persons in Germany was down by 45,000 or 0.1% compared with the second quarter of 2024.

Registered unemployment saw a further slight uptick: in the third quarter, an average of 2.81 million persons were unemployed when viewed on a seasonally adjusted basis, around 52,000 more than in the second quarter. In October, the ranks of the unemployed were swelled by a further 27,000 people compared to the previous month, taking the unemployment rate to 6.1% at last report. Looking at the leading indicators, the labour market situation is neither expected to improve significantly nor deteriorate markedly over the next few months.

Wages still rising steeply at present

Negotiated wages rose by a substantial 8.8% in the third quarter, compared with 3.1% in the previous quarter. According to the Bundesbank, this is the highest year-on-year growth rate since the summer of 1993. It was mainly driven by significant negotiated wage adjustments in the retail sector as well as in wholesale and foreign trade. At present, high wage demands are coinciding with a weak economic setting, the economists write. In view of the economic weakness and the significant fall in inflation rates, the Bundesbank expects the forthcoming wage negotiations to result in distinctly lower agreements.

Consumer prices likely to rise again towards end of year

Consumer prices as measured by the Harmonised Index of Consumer Prices (HICP) rose by a seasonally adjusted 0.3% in the third quarter and thus only around half as much as in the previous two quarters. Energy prices actually saw a marked drop. The headline inflation rate decreased from 2.6% to 2.2% on the year. According to the economists, this was partly due to a dampening base effect caused by the rise in energy prices in the third quarter of 2023. By contrast, the core rate excluding energy and food (3.1%) remained almost as high as in the previous quarter (3.2%).

The Bundesbank is expecting inflation to be somewhat higher still for a time. This is due, on the one hand, to the significant fall in energy prices at the end of 2023, causing the gap between current prices and prior-year prices to widen. On the other hand, one-off effects such as substantial price rises for the “Deutschlandticket” and private health insurance tariffs will drive up prices at the beginning of next year.

Bundesbank expects lull in activity to persist for time being

The lull in activity in the German economy is likely to persist in the fourth quarter as well, the Bundesbank’s economists predict. Factors weighing on the propensity to invest, such as high uncertainty, financing costs that are still relatively high, and low capacity utilisation in industry, remain in place. Private consumption and service providers are expected to provide further support for the economy in the current quarter but the Bundesbank does not expect industry to gain momentum in the fourth quarter. Demand for German industrial products still tends to be weak, according to the Monthly Report.