The Economic Situation in the Federal Republic of Germany in February 2010 [1]

The German economy's recovery from the deep economic slump of the winter half-year 2008/2009 took a pause in the final quarter of 2009. However, the underlying tendencies of the economy continue to point toward recovery. The rebound will continue to be overshadowed in early 2010 by worse-than-average weather conditions that are having a negative impact on output. In the fourth quarter of 2009, Germany's gross domestic product (GDP) stagnated in price-, calendar- and seasonally adjusted terms [2] compared to the previous quarter (+0.0%) [3]. Previously, Germany's economic performance had improved in the aftermath of the winter half-year slump, growing by 0.4% in the second quarter and 0.7% in the third quarter of 2009. Over the course of the fourth quarter of 2009, only foreign trade delivered a positive stimulus to the economy. In contrast, consumer spending and investment declined. Not least, the expiration of the car scrappage scheme in September 2009 reverberated in the figures for the final quarter of the year. However, in spring the economy is likely to make up quickly for the winter's weather-related shortfalls in output, and the German economy is likely to pick up speed throughout the remaining course of 2010.

The rebound in the goods-producing industries weakened noticeably in the fourth quarter of 2009. Key factors contributing to this development included the diminishing impact of policies to promote car sales as well as the comparatively severe onset of winter weather. As a result, total output in the goods-producing industries grew by just 0.3% over the previous quarter in price- and seasonally adjusted terms. This included a 2.6% drop in December compared to the previous month, a trend that was exacerbated by the 2.8% decline in industrial output in December. Nevertheless, industrial output still grew by 1.0% in the fourth quarter as a whole, although this reflected a decline of 10.6% in year-on-year terms (calendar-adjusted). Compared to its peak in the first quarter of 2008, industrial output in the final quarter of 2009 was still down by roughly 18%. The rebound in new industrial orders also slowed noticeably in the fourth quarter of 2009, as orders increased by just 0.7% in price- and seasonally adjusted terms. Within the fourth quarter itself, however, new industrial orders declined markedly by 2.3% in December after increasing substantially by an upwardly revised 2.7% in November. As far as demand is concerned, the underlying trend is likely to continue pointing upward, but with reduced dynamism. New orders in the final quarter of 2009 slowed in particular due to the more modest levels of activity in the automotive sector and its upstream industries. However, in industry, the forces for growth are likely to retain the upper hand overall. This tendency is confirmed by the steady improvement of the ifo Business Climate Index for manufacturing.

Construction output fell 1.8% in the fourth quarter of 2009, in part due to the severe onset of winter weather. In December, output in the construction sector declined by 2.6% in price- and seasonally adjusted terms. Nevertheless, the outlook for construction can continue to be viewed as modestly positive. To be sure, new orders fell by 2.6% in November (price- and seasonally adjusted) and by 2.9% in the three-month comparison, despite tangible stimuli from building construction. However, the effects of stimulus package measures - which will also have a positive impact on finishing trades - are expected to increase further, and this will boost growth in the construction sector after weather-related hindrances subside.

Consumer spending had a dampening effect on growth in the final quarter of 2009. To be sure, retail sales in the narrower sense (i.e. excluding motor vehicles and filling stations) rose in December by 0.9% and by 0.4% for the entire quarter (in price- and seasonally adjusted terms). At the same time, however, the downward trend in vehicle sales continued - as anticipated - in response to the expiration of the car scrappage scheme. The outlook for consumer spending remains restrained for the time being, as labour market risks may balance out recently enacted tax cuts and increases in family benefits.

At present, foreign trade is providing a positive stimulus to the economy. In December, German merchandise exports again experienced a solid gain, rising by 3.0% for the month and by 5.1% for the fourth quarter on the whole (in seasonally adjusted terms). At the same time, imports increased sharply (+4.5%) after declining in both of the previous two months. However, imports declined overall in the fourth quarter by 1.8% due to weak domestic demand; as a result, foreign trade provided a solid contribution to growth for the quarter. Overall developments in the global economy, together with relevant indicators, point to the likelihood of a continuing recovery in foreign trade, albeit with a more modest level of dynamism.

As 2010 gets underway, the labour market continues to demonstrate resilience. Unemployment rose in January, but only at the pace that is normal for this time of year - in all, unemployment was up by just 6,000 persons (seasonally adjusted) for the month. There were 3.617 million unemployed persons in January, up 129,000 from a year ago. The number of employed persons actually rose in December, by 6,000 in seasonally adjusted terms. Total employment thus stood at 40.42 million (unadjusted) and was thus down by only 139,000 compared to a year ago. Job losses continue to be significantly mitigated by flexible working time policies. At the same time, however, the retention of jobs dampens productivity. Therefore, given the high level of capacity underutilisation, the labour market remains under heavy pressure. Yet while the mitigating effects of short-time work arrangements are diminishing, leading indicators do not point to a substantially higher rate of job losses.

Price trends remain very calm, especially at the consumer level. In January, consumer prices were 0.8% above the previous year's level. Factors contributing to this increase included the year-on-year rise in energy prices (+0.9%) and the sharp rise in transportation expenses (+4.5%). The core inflation rate (excluding energy and seasonal foods) slowed somewhat, falling to a low level of +0.8%. Compared to the previous month, consumer prices declined at a somewhat faster pace in January due to seasonal factors (-0.6%) but fell by only 0.1% in seasonally adjusted terms.

Note: A detailed report and commentary on the overall situation and trends in the German economy will be published in the March edition of the monthly report, Schlaglichter der Wirtschaftspolitik ("Economic policy highlights", in German only). This report will be available on the website of the Federal Ministry of Economics and Technology in the middle of the 8^th week of 2010.

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[1] This report is based on statistical data that were available as of 15 February 2010.
[2] Where not otherwise specified, seasonally adjusted data have been calculated in accordance with the Census X-12-ARIMA procedure.
[3] Preliminary data issued by the Federal Statistical Office on 12 February 2010. Comprehensive results on the fourth quarter of 2010 will be published on 24 February 2010.