By David Born

An end to the crisis is not in sight – at least not this year: Following a contraction of 0.3% in the previous year, the German economy continues to face the specter of recession in 2024. Geopolitical risks, coupled with high interest rates, a cooling global economy and domestic uncertainties arising from the recent Federal Constitutional Court ruling on the federal budget, are dampening corporate investment sentiment. While there are sporadic bright spots, such as declining inflation and the looming interest rate shift by central banks, our analysis of key growth indicators predominantly points towards another challenging economic year.

The tension of the situation becomes evident when examining industrial production. In November, it experienced a 4.8% decline compared to the same month in the previous year. The enduring high energy prices played a pivotal role in slowing down production lines. Although these prices have recently eased somewhat, they still remain above pre-energy crisis levels. Consequently, it is unsurprising that energy-intensive industries decreased their production by more than 17% since the beginning of 2022.

The decline in production has not gone unnoticed in terms of capacity utilization in the manufacturing sector. It continues to decrease, reaching only 82% in October, a decrease of 2.9 percentage points compared to the previous year. The downturn was particularly pronounced in energy-intensive sectors. Capacity utilization in the electrical industry contracted by 5.5 percentage points year-on-year, while the metal industry witnessed a 4.9% dip. Notably, the chemical industry saw utilization shrink to 75.1%, marking a decline of 3.8 percentage points. But also in the realm of mechanical engineering, the decrease was noteworthy at 3.1 percentage points.

The decline in new orders was initially curbed in November, showing a 0.3% increase compared to the previous month. However, the orders still remain approximately 4.4% below the levels observed in the same period last year. Particularly, the manufacturing of ‘other transport vehicles’ experienced a 34% decline in new orders compared to the previous month after an exceptionally high surge in demand in October. Similar patterns were observed in the chemical and electrical industries, both facing decreases in orders, albeit not to the extent seen in the other transport vehicle manufacturing sector.

Nevertheless, a glance at the still-high order backlogs reveals that many companies still maintain a respectable safety cushion. While the order backlog dwindled further in October compared to the previous month (-0.6%), industry-wide order books still cover an average of 6.9 months. The only cause for increased concern lies in the automotive industry, where order backlogs are depleting much faster than in other sectors (-2.9%).

Amid the challenging economic conditions, bankruptcy filings are once again gaining momentum. In 2023, the number of corporate bankruptcies increased by 23.5% to 18,100 cases. On one hand, this suggests a return to normalcy as the figures now align with pre-pandemic levels, following the temporary suspension of bankruptcy reporting requirements during the pandemic. On the other hand, it is anticipated that the bankruptcy figures will continue to rise significantly in 2024.

A glimmer of hope: The decline in producer prices continues, with an average decrease of 7.9% in November 2023, following a notable 11.0% drop in October. This positive development can be attributed particularly to lower prices for electricity as well as natural gas and petroleum products. Excluding energy prices, producer prices saw a slight increase of 0.3% in year-on-year comparison. Outliers in the form of food (+3.4%) and consumer goods (+4.0%) contribute to this mild upward trend.

However, there is yet no respite on the inflation front. The inflation rate increased in December for the first time in five months, reaching 3.7%, up from the November rate of 3.2%. This can be partly explained by a base effect in energy prices, but persistently high price increases in the food sector are also reigniting inflation, with all the associated negative impacts on consumer sentiment. For 2023, initial estimates indicate a 3.1% decline in retail sales compared to the previous year.

The labor market has also noticeably cooled. The number of job openings fell to 713,000 in December, the lowest since the record high in August 2022 (887,000). Notably, this trend is affecting companies of all sizes, indicating an overall hesitancy in recruitment efforts. Against this backdrop, the number of unemployed individuals reached 2.64 million (5.7%) in December 2023, with 183,000 more people registering as unemployed compared to the same period last year.

In an overarching assessment, the indicators offer little reason for optimism. Following a challenging year in 2023, there is no indication of a turnaround. While a decrease in inflation is expected to lead to a modest recovery in both private consumption and real wages, companies are likely to continue to act cautiously in investment decisions due to persistently high interest rates, weak business prospects, and geopolitical uncertainties. The same caution applies to the export sector, which, facing a cooling global economy, is unable to serve as a driving force. Therefore, the Roland Berger Institute anticipates a contraction in economic performance by -0.1% in its 2024 forecast. A modest upturn of +1.5% is projected only in 2025.