Germany’s economy records a third quarter without growth

What’s happened?

Second-quarter real GDP stagnated on a quarterly basis, following mild contractions in the previous two quarters. Household consumption stabilised after declining over the 2022/23 winter, while net exports were a modest drag on growth. Leading indicators and most activity data in Germany have weakened since April-May, implying a high likelihood of a contraction in third-quarter GDP. Cooling global demand, an industrial sector downturn, ongoing structural constraints and squeezed purchasing power suggest that economic weakness will persist well into 2024.

Why does it matter?

Stagnant output in April-June marked a third successive quarter without growth, following contractions in the previous two quarters. Household consumption stabilised after a cumulative 1% fall over the winter, supported by firmer services consumption, but remained almost 2% below its pre-pandemic level. Fixed investment and government consumption edged up slightly, with the external balance contributing negatively to growth, owing to a decline in exports of goods and services. On an annual basis, real GDP was 0.2% below its year-earlier level. The German economy has underperformed compared with most peer countries since mid-2022, owing in part to the exposure of its large export sector to elevated input costs and subdued external demand, especially from China.

Recent sharp falls in business sentiment point to a likely contraction in third-quarter real GDP. The headline Ifo business climate index declined for a fourth consecutive month in August, to a ten-month low. Firms’ assessment of current conditions dropped to its weakest level since mid-2020, as did the composite purchasing managers’ index (PMI) for Germany. The manufacturing PMI has been signalling a sectoral downturn for some time, but a drop in the services PMI to sub-50 contraction territory points to signs of a broadening slowdown.

Most high-frequency activity indicators for Germany have weakened over recent months. Manufacturing output has fallen gradually since February, and the near-term outlook remains poor, given a weak trend in new industrial orders and with most firms having now worked through pandemic-related backlogs. The construction sector shows a similar trend, with residential building activity and granted permits having fallen steadily, amid a cooling of the real estate sector. Indicators of road freight activity, online restaurant bookings and economy-wide labour demand have also softened. A partial recovery in consumer sentiment from its mid-2022 slump has also reversed; household expectations for the economy, personal income and major purchases have all turned slightly lower.

What next?

There is a high risk of an additional GDP contraction in the third quarter, and we are likely to downgrade our current full-year GDP forecast (currently a 0.3% contraction). This would represent the fourth consecutive quarter with flat or negative GDP growth.

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