Germany – is this the turning point?

The slight increase in real GDP in the first quarter and the improved sentiment among companies point to a recovery in the German economy.

Dr. Jörg Krämer, Dr. Ralph Solveen

Commerzbank Economic Research

May 3 2024

Especially as the burden from monetary policy and energy prices is easing. We have therefore raised our growth forecast for Germany slightly this week. However, the weak trend of orders in construction and industry to date and the poor mood among consumers suggest that growth will not speed up until the middle of the year. In addition, the momentum is likely to be restrained because monetary policy will only loosen slightly and the numerous structural problems remain largely unresolved.

Signs of hope: growth in Q1 ...

Since last fall, many institutions and economists have significantly lowered their economic forecasts for Germany. It is therefore remarkable that the German government recently did not reduce its growth forecast for this year any further, but instead increased it slightly from 0.2% to 0.3%. We also raised our forecast this week, which was justifiably well below the consensus forecast for most of last year. We now expect the German economy to stagnate this year instead of shrinking by 0.3%. This upward revision was mainly due to the fact that, contrary to original expectations of a renewed drop, the GDP increased slightly by 0.2% in the first quarter compared to the fourth quarter of 2023. This has improved the starting point for our 2024 forecast.

... and better sentiment among companies

In addition, the Ifo business climate has risen three times in a row by now. As a consequence, the 6-month average has turned upwards, which has usually been a reliable turning signal in the past. However, the mood has not only improved in Germany, but also in many other countries. The combined PMI for the manufacturing and service sectors in the eurozone has risen four times in a row and has clearly left the recession zone behind. The global purchasing managers' index for the manufacturing industry has also recovered somewhat since the turn of the year.

This time probably not an "expectations bubble", ...

Skeptics will object that the improvement in the indicators merely reflects mostly positive expectations that are not yet substantiated by an improved economic situation. They might fear an expectations bubble, as it was observed in the Ifo business climate in the winter half-year 2022/23 (Chart 1). While companies revised their business expectations for the subsequent six months significantly upwards at the time, they hardly improved their assessment of the current business situation. In fact, there was no upswing afterwards, but the economic downturn continued.