By David Born

The anticipated turnaround in the German economy by mid-year seems to be absent – key indicators point to a continuing weakness in the current economic climate. After a year of negative growth in 2023, this year threatens to bring stagnation. High interest rates and (geo-) political uncertainties continue to challenge the German economy, even though the European Central Bank has initiated a turnaround in interest rates and further rate cuts are expected by the end of the year.

The German economy remains under considerable economic strain. The tense situation is evident when looking at the order books. In June 2024, the index of incoming orders in the manufacturing sector was 11.8 percent below the value of the same month last year. The decline in foreign orders was significantly more pronounced at -15.5 percent compared to the previous year than the decline in domestic orders (-6.1 percent). The automotive sector and other vehicle manufacturing saw a particularly sharp decline in incoming orders. The order backlog in the manufacturing sector in May was also 5.4 percent lower compared to the same month last year.

The deterioration in the order situation did not remain without effect on industrial production. The industrial production continued to decline and was more than 4 percent below the previous year's value in June 2024. The production weakness was observed in a number of economic sectors: The largest declines compared to the same month last year were recorded in the automotive (-10.5 percent) and mechanical engineering (-13.7 percent) sectors. The decline in production in the energy-intensive sectors seems to have stopped for the time being – production recently increased slightly due to falling energy prices but remains at a low level.

The weak order situation also affects capacity utilization. In the majority of industrial sectors, it is significantly declining. In July 2024, the utilization in the manufacturing sector fell to 77.5 percent, a decrease of 5.5 percentage points compared to July 2023. The decline was particularly pronounced in mechanical engineering (-9.4 percentage points to 78.9 percent) and the automotive sector (-8.6 percentage points to 79.0 percent).

The weak capacity utilization in industry is also reflected in the labor market figures: In July 2024, there were about 192,000 more unemployed people than in the same month last year, raising the total number of unemployed people to 2.81 million and the unemployment rate to 6.0 percent. In addition, the number of short-time workers in May 2024 was almost 50 percent above the level of the same month last year.

Furthermore, the majority of German companies do not foresee any improvement in the near future. For two years, the business expectations of German companies – measured by the ifo business climate index – have been negative in all economic sectors. In July 2024, pessimism even increased slightly. This suggests that the hopes for a turnaround held by companies earlier in the year are gradually dissipating.

A glimmer of hope: Flattening inflation has enabled the European Central Bank to initiate its interest rate turnaround. In July, it cut interest rates for the first time by 25 basis points, after having drastically increased the key interest rates to combat inflation since autumn 2022. Market participants expect two more rate cuts for the remainder of the year.

Overall, the indicators do not provide much cause for optimism. Although the expected rate cuts should contribute to a slight easing, the still high level of interest rates, geopolitical uncertainties, and weak business prospects are likely to prevent a turnaround. The Roland Berger Institute, therefore, forecasts a growth in economic performance of only 0.1 percent for 2024. With this, Germany is the laggard among the G20 nations this year, with the exception of Argentina. Only in 2025 is stronger growth of 1.2 percent expected.