Germany Macro Signal–May 2024: Externally-Driven Gradual Recovery

MNI Point of View: Externally-Driven Gradual Recovery

Data released since early 2024 suggest that cyclical factors dragging down the German economy are slowly subsiding, though a set of structural issues persists, making the ongoing recovery slow and bumpy.

• Real GDP rose 0.2% Q/Q in Q1 24, and industrial production printed consecutive upticks in two out of the last three monthly reports. Services sector turnover reached an all-time high in February and retail sales seem to have stabilized, although at a very low level. A detailed look at the data suggests that the uptick is largely externally rather than domestically driven – which makes the recovery more fragile.
• Growth-positive fiscal impulses continue to be limited – there have been rumours of larger enterprise-targeted tax breaks, but no details have been confirmed yet.
• The labour market continues to see further, services-driven, upticks in employment. A large round of collective bargaining of centrally negotiated wages triggered strong real wage increases in March, slowly making up the inflation-driven erosion of last year. This will likely boost consumer spending going forward.
• Headline CPI inflation accelerated in May, driven by not only the disappearance of a transport-related base effect, but also underlying stickiness in the services sector.
• While an ECB rate cut in June is all but confirmed, market pricing for the rate path past June continues to be pushed forwards – so a large amount of monetary policy easing is not to be expected soon.
• Medium-Term Outlook: From a broader perspective, a rebound in German economic conditions is expected, but will likely be gradual in nature. Analyst forecasts for 2024 have improved across a wide set of indicators.

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