Germany’s Economy is Showing Signs of Life, but Industry is Struggling

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(Bloomberg) — Germany’s economic prospects are looking up after two grueling years of near-zero growth. The consumer-led revival, though, papers over enduring industrial weakness for which there’s no quick fix.

Data this week signaled the fledgling recovery in Europe’s largest economy is gaining momentum — especially in service sectors like tourism and hospitality. The mood among businesses is perking up as confidence builds that a widely anticipated winter recession has, in fact, been avoided.

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Even as factories remain in decline, the green shoots are being welcomed in the 20-nation euro zone, where Germany was the main driver of expansion before rising energy costs and weakening Chinese demand made the country the biggest laggard.

Politics could also benefit, with rising wages, a decline in inflation and the likelihood of impending interest rate cuts improving the outlook – helping to blunt the appeal of the far-right AfD party, whose support has risen sharply in recent years.

“Consumers are a little more certain about the development and are happy to spend a little more,” said Anja Heimann, economist at HSBC. But since the manufacturing sector is still in decline, “we don’t really expect a strong upswing in Germany because industry accounts for such a large share of overall growth.”

An initial assessment of gross domestic product for the first quarter is expected from Destatis on Tuesday. The Bundesbank recently reversed its earlier call for a decline and is now forecasting growth, albeit modest. Due to the decline in production in the previous period, rising industrial production and better performance in the construction sector in mild winter weather are likely to have boosted the result.

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This view is in line with economists surveyed by Bloomberg, who estimate a 0.1% increase in GDP. However, a nowcast from Bloomberg Economics still suggests a slight decline.

What Bloomberg Economics Says…

“According to current survey data, the German economy is on course for recovery. The stronger April reading of the Ifo Business Climate Index indicates above-expected activity in the current quarter, mainly driven by accelerated growth in the services sector.”

—Martin Ademmer, economist. Click here to read the full notice

Whatever the outcome, there’s a good chance this quarter will be stronger. According to GfK, business expectations measured by the Ifo Institute reached an annual high in April, while consumer sentiment rose for the third time thanks to rising salary expectations.

The renewed belief comes amid easing inflation, which has slowed to 2.3% from a peak of 11.6%. This trend is reflected across the region and led the European Central Bank to announce a first rate cut in June after its flurry of rate hikes.

Companies reporting first-quarter results this week began to reflect the better news: Software maker SAP SE expects record revenue growth in its cloud business, while Adidas AG raised its profit target.

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However, the extent of Germany’s recovery will be tempered by its oversized manufacturing sector, whose malaise has now been going on for nearly two years, according to S&P Global’s latest survey of purchasing managers.

Chemical giant BASF SE reported a decline in profits at the start of 2024. Chief Executive Martin Brudermüller said he could confirm “no fundamental turnaround” in his industry, which has been hit by higher gas prices and weak foreign demand.

The mood in the flagship automotive industry isn’t much better. Supplier Continental AG fell short of already low expectations, and CEO Nikolai Setzer warned shareholders on Friday of a “sluggish start to the year.”

Some are optimistic that manufacturers will eventually catch up with other parts of the economy.

Bundesbank President Joachim Nagel said he was hearing about “relatively robust” factory orders, while analysts at Deutsche Bank AG were optimistic that global growth would support exports in the coming months. The International Monetary Fund recently slightly raised its forecast for world production in 2024 to 3.2%.

Chancellor Olaf Scholz also expressed his optimism: “The contribution of German industry to growth, prosperity and employment remains unbroken.”

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While it will take time for manufacturers to feel the benefits of loose monetary policy, exports could benefit from more stable global trade this year. In fact, Ifo President Clemens Fuest is surprised that this isn’t already happening.

“We are seeing an improvement in the global economy, but it doesn’t seem to be affecting German manufacturing,” he told Bloomberg TV’s Francine Lacqua. “We don’t see any recovery there yet. Hopefully it will come, but it may take some time.”

Structural concerns are also big. Low longer-term GDP forecasts worried Economics Minister Robert Habeck as he provided a poor update to this year’s forecast on Wednesday. The government now expects growth of 0.3% – previously it was 0.2%.

“We must enable new economic dynamism, strengthen innovation, reduce unnecessary bureaucracy and resolutely address the labor shortage,” said Habeck.

This has proven difficult. A recently passed tax relief package worth 3.2 billion euros was watered down in lengthy negotiations and seen by Finance Minister Christian Lindner as only a first step towards faster economic growth.

In addition, Scholz’s three-party coalition must find around 20 billion euros in savings for next year’s budget in order to comply with constitutional debt limits. The resulting debate could slow the economic recovery, but not prevent it, says Holger Schmieding, chief economist at Berenberg.

“As long as political uncertainty does not worsen, households and businesses are likely to increase spending from recent low levels,” he said. “The recovery in business and consumer expectations suggests this.”

– With support from Ben Sills and Kamil Kowalcze.

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