Consumption and Manufacturing Send Contrasting Impulses for the German Economy
“The German economy is divided at the start of the year.” This is how Timo Wollmershäuser, Head of Forecasts at ifo, responded when Germany’s Federal Statistical Office reported that economic output in the first quarter of 2023 stagnated. “On the one hand, manufacturers are benefiting from easing supply bottlenecks as well as lower energy prices, and they are now on course for growth. On the other hand, high inflation is eroding the purchasing power of private households and causing consumption to shrink,” Wollmershäuser adds.
In manufacturing, the upward trend is likely to continue for the rest of the year. The business climate has already improved six times in a row and is now in positive territory. Order books are full to bursting, and the gradual revival of the global economy will continue to boost new orders. Thus, there are promising signs of an expansion of exports and investment in equipment.
Consumer spending will only recover slowly. While income growth of private households is accelerating, because collectively agreed wages are being raised and inflation bonuses are being paid out, inflation is likely to remain stubbornly high in the months ahead. Real wages are therefore unlikely to rise until the second half of the year. Even though sentiment among consumer-related service providers and retailers was improving until recently, for the majority of them it is still negative.
The construction industry experienced a temporary boost at the beginning of the year due to the mild weather, after an extremely cold December. However, the downward trend, which is mainly driven by residential construction, is not expected to change throughout the remainder of the year. High financing and construction costs have caused new orders to slump and cancellations of existing orders to increase. The business climate among construction companies is now as bad as it last was following the global financial crisis in 2010.
