Quarterly Report Germany IV/2021

QIV-2021 QUARTERLY REPORT GERMANY

Exports much lower than expected BDI downwardly adjusts GDP growth forecast for the year to just 2.5 percent

▪

German GDP will only get back to pre-crisis levels in 2022. Gross domestic product (GDP) rose by 1.7 percent compared to the previous quarter following price, calendar and seasonal adjustment. Fourth quarter GDP would have to exceed third quarter GDP by 1.1 percent to reach pre-crisis levels, which is not on the cards.

▪

Industry order books are full, but production is still sluggish. Shortages of supplies, which have kept production levels down over the spring and autumn, show no sign of improving any time soon.

▪

Supply bottlenecks in the automotive industry are curbing “made in Germany” exports. The BDI no longer expects the export of goods and services to grow 8.5 percent this year but by only eight percent in real terms.

This would reduce the contribution to GDP of net exports from 1.2 percentage points down to 0.8 percentage points.

▪

GDP growth forecast adjusted on account of weaker-than-expected exports and strong imports. We now forecast overall economic output in 2021 to expand by only 2.5 percent in real terms (down from 3.0 percent).

Exports much lower than expected | BDI downwardly adjusts GDP growth forecast for the year to just 2.5 percent 17/12/2021

Content German economy ................................................................................................................................ 3 Omicron variant and supply bottlenecks put an abrupt end to spring and autumn upturn ................... 3 Foreign trade: trade with US picks up ................................................................................................... 4 Labour market: employment rising again with some indicators higher than pre-crisis ......................... 5 Robust rise in incoming orders for industry at start of fourth quarter .................................................... 7 Industrial production: sluggish momentum despite full order books ..................................................... 8 Capacity utilisation remains high ......................................................................................................... 10 Sales in manufacturing exaggerated by low base level ...................................................................... 10 Business climate: partial lockdown wearing down sentiment ............................................................. 11 Outlook ............................................................................................................................................... 12 Sources .............................................................................................................................................. 15 Imprint ................................................................................................................................................ 15 Basic data for national accounts ..................................................................................................... 16

2

Exports much lower than expected | BDI downwardly adjusts GDP growth forecast for the year to just 2.5 percent 17/12/2021

German economy Omicron variant and supply bottlenecks put an abrupt end to spring and autumn upturn The German economy continued to grow throughout the summer. Real domestic gross product (GDP) rose 1.7 percent in the third quarter compared to the second quarter, following an increase of two percent in the second quarter. Compared to GDP levels before the outbreak of the pandemic (fourth quarter 2019), economic output was down by 1.1 percent.

As in the second quarter 2021, German GDP also rose year on year in the third quarter 2021. Real GDP was 2.5 percent higher than in the third quarter 2021 following price and calendar adjustment.

Other major EU member states recorded higher levels of growth, with Spain rising 2.7 percent, France 3.3 percent, and Italy 3.8 percent, but these countries also experienced much steeper drops in GDP last year. Third quarter year-on-year growth for the EU and the euro area stood at 3.9 percent and 3.7 percent respectively, according to Eurostat calculations.

Germany’s economic output in the third quarter 2021 was generated by a workforce of 45.06 million.

That is 267,000 more than one year ago. Compared to pre-crisis levels there are still 370,000 more people out of employment. The labour volume measured in the number of working hours was 2.4 percent higher year on year, but 1.3 percent lower than in the fourth quarter 2019 following seasonal adjustment.

Gross value added grew by 2.6 percent in the third quarter 2021 compared to the previous year. While all economic sectors apart from agriculture and forestry expanded, total gross value added was still 1.4 percent below pre-crisis levels following seasonal adjustment. Many industries managed to exceed pre-crisis levels, with public service providers 2.7 percent higher, construction 2.7 percent, financial and insurance providers 1.8 percent, information and communications 1.2 percent and retail, and transport and hospitality 0.2 percent, but gross value added in manufacturing was down by as much as 8.8 percent. Other industries which failed to reach pre-crisis levels were corporate service providers (down 2.5 percent) and other service providers (down 2.3 percent).

On the expenditure side of GDP, consumption expenditure of private households in the third quarter 2021 was up 1.6 percent year on year in real terms. With the lifting of restrictions that started in spring, spending increased particularly on contact-intensive activities. Private households spent 8.6 percent more on leisure, entertainment, and culture, and four percent more on both clothing and shoes, and hotels and restaurants than one year ago. Expenditure on housing, water, electricity, and heating remained almost steady (up 0.2 percent). Year on year, spending was down on transport and communications (down 3.8 percent), on home furnishings and household goods (down 1.8 percent) and on food, beverages, and tobacco (down 1.6 percent). State consumption expenditure saw slightly more momentum, rising 2.2 percent in the third quarter, bringing total consumption expenditure in the summer quarter up to only 1.8 percent over the same period last year.

Following a sharp uptick in spring, gross fixed capital formation only rose 0.7 percent in the third quarter 2021 following price adjustment. Investment in plant and equipment was responsible for this poor performance, dropping 1.9 percent after a strong rise in spring. Residential construction increased considerably but investment in non-residential buildings was slightly down bringing total construction investment to just two percent up on last year. Investment in other assets (patents and licences) nudged up 0.8 percent.

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Exports much lower than expected | BDI downwardly adjusts GDP growth forecast for the year to just 2.5 percent 17/12/2021

Growth in real GDP in percent 12 10 8 6

2.7

4

1.1

1.1

2 0 -2 -4 -6

-4.6

-8 -10 -12 I

II

III

IV

I

2017

II

III

IV

2018

I

II

III

2019

IV

I

II

III

2020

IV

I

II

III

IV

2021

change over previous year quarter change over previous quarter change over previous year Source: Federal Statistical Office

The export of goods and services increased 5.5 percent in the third quarter 2021 following price adjustment. Goods exports increased 4.9 percent year on year and exported services grew by 8.2 percent. Among imports, imported goods rose 5.6 percent while imported services surged 20.8 percent, fuelled by the expanded opportunities to travel. Overall, imports grew 8.9 percent, strides ahead of exports, so that net exports brought GDP down by 0.9 percentage points in the third quarter.

Foreign trade: trade with US picks up Although momentum has begun to tail off just recently, German exports increased by 33.5 billion euros or eleven percent in the third quarter 2021 compared to the same period last year to reach 337.4 billion euros (country-specific seasonally adjusted data is not available). Compared to the second quarter 2019, this represents an increase of two percent. The strongest growth, in absolute terms, was in trade with the US (up 4.91 billion euros or 18.8 percent) and with the Netherlands (up 4.10 billion euros or 19.6 percent). Among EU partner countries, exports to Italy, Austria and Poland expanded by more than two billion euros in each case. Exports to France recorded below-average growth of 7.7 percent, still a good 5.4 percent below pre-crisis levels. Despite the robust economic upturn in the United Kingdom, exports to the country were down by 1.06 billion euros or 6.1 percent. Compared to the second quarter 2019, exports decreased by as much as 3.11 billion euros or 15.9 percent.

German imports also recorded a robust increase year on year in the third quarter 2021, rising 39.5 billion euros or 15.7 percent. The strongest growth in nominal terms was in trade with the Netherlands (up 5.21 billion euros or 25.2 percent), with China (up 4.79 billion euros or 16.1 percent) and Belgium (up 4.48 billion euros or 52.2 percent). The steep increase in imports from energy exporters, with imports from Russia up by 74.3 percent and Norway up by 140 percent, is partially due

4

Exports much lower than expected | BDI downwardly adjusts GDP growth forecast for the year to just 2.5 percent 17/12/2021

to surging energy prices. Imports were down from Ireland (down 564 million euros or 9.9 percent) and from Slovakia (down 759 million euros or 18.4 percent).

German exports and imports in Q3 2021 in selected countries Year-on-year change increase (+) or decrease (-) in exports in million euros

increase (+) or decrease (-) in imports

in %

in million euros

in %

USA

30 990

+ 4 906

+

18.8

Netherlands

25 903

+ 5 208

+ 25.2

Netherlands

25 010

+ 4 096

+

19.6

China

34 524

+ 4 790

+ 16.1

Italy

17 929

+ 2 826

+

18.7

Belgium

13 035

+ 4 472

+ 52.2

Austria

17 981

+ 2 775

+

18.2

Russia

8 422

+ 3 590

+ 74.3

Poland

19 052

+ 2 313

+

13.8

Norway

4 129

+ 2 410

+ 140.1

France

24 296

+ 1 729

+

7.7

Italy

15 744

+ 2 200

+ 16.2

Czech Republic

11 311

+ 1 478

+

15.0

France

15 020

+ 1 858

+ 14.1

Belgium

12 152

+ 1 421

+

13.2

Poland

16 577

+ 1 677

+ 11.3

Spain

10 360

+ 1 003

+

10.7

Austria

11 859

+ 1 620

+ 15.8

Switzerland

14 768

+

954

+

6.9

Japan

5 986

+ 1 035

+ 20.9

Sweden

6 418

+

862

+

15.5

Switzerland

11 726

+

971

+

9.0

Russia

6 801

+

809

+

13.5

USA

17 962

+

917

+

5.4

Hungary

7 247

+

672

+

10.2

Taiwan

3 196

+

885

+ 38.3

Denmark

5 153

+

580

+

12.7

South Sudan

3 013

+

841

+ 38.7

Ireland

1 836

-

336

-

15.5

Ireland

5 115

-

564

-

9.9

16 455

- 1 067

-

6.1

Slovakia

3 363

-

759

-

18.4

337 446

+ 33 484

+

11.0

Great Britain Total

Total

291 857

+ 39 501

+ 15.7

Sources: Federal Statistical Office, own calculations

Labour market: employment rising again with some indicators higher than pre-crisis The robust upward trend in employment over the summer started losing steam in autumn. According to preliminary data from the German Federal Statistical Office, the number of people in employment

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Exports much lower than expected | BDI downwardly adjusts GDP growth forecast for the year to just 2.5 percent 17/12/2021

rose by 34,000 in October 2021 following seasonal adjustment. The average increase recorded between June and August was twice as high. Compared to October 2020, the number of people in employment was up by 289,000 or 0.6 percent to a total of 45.34 million. Before seasonal adjustment, there were 183,000 more people in employment in October 2021 than before the pandemic, but this figure flips down to 388,000 less people in employment following seasonal adjustment.

The number of workers in employment subject to social security contributions has been higher than before the outbreak of the pandemic since June 2021. According to the latest projections of the Federal Employment Agency a total of 33.31 million people were in employment subject to social security contributions in September 2021 (most recent figure available). That is 522,000 people more than one year ago and 195,000 more than in February 2020. Year on year, the number of workers in full-time employment subject to social security contributions increased by 318,000 or 1.3 percent.

The number of workers in part-time employment subject to social security contributions recorded markedly higher growth, increasing by 203,000 or 2.1 percent in the same period.

Year on year, other forms of employment continued their downturn. The number of self-employed people including contributing family members dropped by 101,000 or 2.5 percent to 3.93 million in the third quarter 2021. Compared to the fourth quarter 2019 and following seasonal adjustment, this represents a drop of 190,000 or 4.6 percent. The number of people exclusively in marginal employment also declined, going down by 101,000 or 2.5 percent to 4.13 million in September, according to preliminary figures from the Federal Employment Agency. This is a substantial 362,000 or eight percent less than before the pandemic. The number of unemployed people decreased by 382,000 or 14.2 percent to 2.31 million in November 2021 (year on year). Employment following seasonal adjustment decreased for the seventh time in a row, going down by 34,000 in November.

The unemployment rate in November 2021 was at 5.3 percent as calculated by the Federal Employment Agency, or 3.3 percent according to the ILO definition.

German labour market* 4 34 Unemployed persons (right axis) 3

32

2 Employed persons covered by social security (left axis) 1

30 0

28

2013 2012

2014 2013

2015 2014

2016 2015

2017 2016

2018 2017

2019

2020

2 2021

-1

Difference in the number of workers making social security contributions from the same month last year (right axis) *seasonally adjusted in million Source: Federal Employment Agency

.

6

Exports much lower than expected | BDI downwardly adjusts GDP growth forecast for the year to just 2.5 percent 17/12/2021

Robust rise in incoming orders for industry at start of fourth quarter According to preliminary figures, incoming orders for German industry were 6.9 percent lower in October 2021 than in September, following price, seasonal and calendar adjustment. Without large orders, however, incoming orders were only down by 1.8 percent. Year on year, incoming orders were down 0.8 percent – the first time this figure has been negative in thirteen months. Demand from at home bucked the downward trend, rising 3.4 percent above the previous month. Orders from abroad, meanwhile, plummeted 13.1 percent on account of the high volume of large orders placed in September, inflating the base level.

New orders, manufacturing 120

75

115

65

110

55

105

45

100

35

95

25

90 2.5

85

3.3

15

1.2

5

80

-5

75

-8.7

70

-15 -25

65

-35 2017

2018

2019

2020

2021

Change over previous year, two-month-average, in percent (right axis) Volume index in manufacturing, two-month-average, seasonally adjusted (left axis) Change over previous quarter (q-o-q), in percent Source: Federal Statistical Office

Following an adjustment of the September figures, incoming orders in the third quarter 2021 were 1.2 percent higher than in the spring quarter following seasonal and calendar adjustment. Compared to the third quarter 2020, orders were up by 15.6 percent. Looking at the origin of the orders, domestic orders in the third quarter 2021 dropped by 3.3 percent compared to the second quarter. Demand from within the euro area also decreased compared to the previous quarter (down 2.2 percent). Foreign orders overall still increased by 4.3 percent on the back of robust demand from third countries (up 8.3 percent).

Among the main groups of industrial goods, demand for consumer goods remained steady (down 0.2 percent) compared to the second quarter 2021 and following seasonal and calendar adjustment. Year on year, incoming orders were down by 7.9 percent. Capital goods producers received 3.5 percent more orders than in the previous quarter thanks to a steep increase in demand from abroad. Domestic orders have lost steam according to the latest figures. Year on year, incoming orders were up by 16.9 percent. The producers of intermediates received 2.9 percent fewer orders in

7

Exports much lower than expected | BDI downwardly adjusts GDP growth forecast for the year to just 2.5 percent 17/12/2021

the autumn than in spring, although, year on year, orders were up by 15.1 percent with parallel growth in demand from at home and abroad.

The continuing shortages of some intermediates are still limiting production in many factories. Order books are consequently continuing to swell. According to figures from the ifo Institute, the reach of orders in hand in manufacturing once again hit a new record high of 4.2 production months at the beginning of the fourth quarter 2021. The order books of capital goods producers are the fullest. The reach of orders in hand for this sector recorded an all-time high of 5.7 production months (previously 4.8 months) which is also two production months above the long-term average of the last ten years.

The reach of orders in hand also climbed to a new all-time high for the producers of intermediates.

Companies in this sector have a backlog of orders worth 3.7 production months. Consumer goods producers have managed to reduce their backlog of orders slightly, with the reach of orders in hand dropping to 2.2 months, only slightly higher than the long-term average.

According to figures from the German Federal Statistical Office, the orders in hand in manufacturing in September 2021 were up by 2.4 percent on the previous month following price, seasonal and calendar adjustment, reaching their highest level since this data series began in January 2015.

Domestic orders in hand were 1.3 percent higher than in August, with orders in hand from abroad increasing by 3.1 percent in the same period. Compared to February 2020, before restrictions were put in place in Germany to combat the Covid pandemic, orders in hand in September 2021 were just over 25 percent higher following seasonal and calendar adjustment. Orders in hand for the producers of intermediates rose by 1.8 percent in September compared to August. Among capital goods producers, orders in hand increased 2.7 percent, primarily on account of the high demand in vehicle manufacturing (up 5.9 percent) and machinery manufacturing (up 3.9 percent). Consumer goods producers, in contrast, had 0.5 percent less orders in hand than in the previous month.

Industrial production: sluggish momentum despite full order books Industrial production (manufacturing excluding energy and construction) increased by 3.2 percent compared to the previous month and following seasonal and calendar adjustment. Furthermore, figures for September were upwardly revised bringing the drop in production for that month from minus 1.5 percent up to minus 1.3 percent. The construction industry also recorded growth in October compared to the previous month (up 1.2 percent). Energy production also rose slightly (up 0.9 percent). In manufacturing overall, production increased by 2.8 percent in October 2021 compared to September. Year on year production was down by a slim 0.6 percent.

Despite the upward revision of the September figures, manufacturing output dropped 2.4 percent in the third quarter 2021 compared to the previous quarter and following seasonal and calendar adjustment. Following a drop of 1.1 percent in the second quarter and stagnation at the start of the year, industry has not seen any quarter-on-quarter growth so far. Production was 2.7 percent higher than in the third quarter last year, but production levels then were very low. Energy production decreased by 2.2 percent in the third quarter compared to the previous quarter and following seasonal and calendar adjustment. Year on year, production was up 1.1 percent. Construction activity contracted 1.1 percent compared to the previous quarter but increased by 1.5 percent compared to the third quarter 2020.

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Exports much lower than expected | BDI downwardly adjusts GDP growth forecast for the year to just 2.5 percent 17/12/2021

Among the main industrial groups, production trends in the third quarter 2021 diverged. Producers of intermediates decreased their output by three percent compared to the previous quarter.

Compared to the third quarter 2020, production was nonetheless up s ubstantially (up 7.9 percent).

The production of capital goods was four percent down on the previous quarter and 2.7 percent lower year on year. These weak figures were primarily due to low output levels in vehicle manufacturing and, more recently, machinery manufacturing. The only sector showing a clear upward trend was consumer goods producers. Production here increased by 3.2 percent compared to the previous quarter. The increase was even larger year on year, with production up 5.2 percent.

Production development in the manufacturing industry year on year change in percent 2019 2020 2021 year Q1 Q2 Q3 original value calendar adjusted

compared to previous period in percent 2021 Q1 Q2 Q3 Aug Sep Oct seasonally and calendar adjusted

Production

- 3.3

- 7.3

- 1.7

15.9

2.3

- 0.8

- 0.3

- 2.4

- 3.5

- 0.5

2.8

Industry

- 4.2

- 9.6

- 1.2

19.7

2.7

0.0

- 1.1

- 2.4

- 4.2

- 1.3

3.2

Intermediate goods

- 3.6

- 6.1

2.3

22.4

7.9

2.1

1.0

- 3.0

- 2.5

- 1.2

- 0.4

Capital goods

- 4.5

-14.6

- 3.3

22.8

- 2.7

- 1.9

- 4.0

- 4.0

- 6.7

- 1.9

8.2

Consumer goods

- 4.7

- 3.7

- 3.3

7.6

5.2

0.2

1.3

3.2

- 2.4

0.2

- 0.1

Energy

- 7.2

- 6.1

- 2.3

11.9

1.1

- 1.9

2.5

- 2.2

4.1

3.1

0.9

Construction industry

3.3

4.2

- 4.7

2.0

1.1

- 4.2

2.6

- 2.2

- 2.6

2.2

1.2

Construction industry proper

5.9

5.4

- 3.0

2.5

1.5

- 0.3

2.7

- 1.1

- 3.3

3.3

0.9

Finishing industry

1.0

3.1

- 6.2

1.5

0.6

- 7.7

2.6

- 3.2

- 1.9

1.2

1.6

Sources: Federal Statistical Office, own calculations

A look at the trends in the individual industries still shows a steady upward development in the third quarter 2021 compared to the same period last year across almost all industries.

Machinery manufacturing, chemicals and pharmaceuticals, metal producers and metalworking companies recorded growth rates of around eight percent, with electrics and electronics even increasing production by just over 13 percent. Vehicle manufacturing, in contrast, registered its second strongest drop in output since the financial crisis, plummeting 22.9 percent. Apart from individual consumer-related industries such as pharmaceuticals and food and clothing, most industries failed to maintain production levels reached in the second quarter 2021. Incoming orders and production are drifting further apart with no end of this trend in sight.

9

Exports much lower than expected | BDI downwardly adjusts GDP growth forecast for the year to just 2.5 percent 17/12/2021

Production, manufacturing 110

40 30

100

20 10

90

0.8

0.0

0 -1.1

-2.4 -10

80

-20 70

-30 2017

2018

2019

2020

2021

Change over previous year, two-month-comparison, in percent (right axis) Volume index in manufacturing, two-month-average, seasonally adjusted (left axis) Change over previous quarter (q-o-q), in percent

Source: Federal Statistical Office

Capacity utilisation remains high The drop in production brought on by supply shortages has, in turn, lowered capacity utilisation.

According to figures from the ifo Institute, capacity utilisation in manufacturing dropped by 2.1 percentage points down to 84.8 percent at the beginning of the fourth quarter. Despite this drop, capacity utilisation was still 0.6 percentage points higher than the average over the last ten years.

Capacity utilisation in manufacturing excluding food dropped by 0.7 percentage points to 81.5 percent, which is still 0.7 percentage points higher than the average over the last ten years.

Trends varied across the individual industries. In vehicle manufacturing, capacity utilisation tumbled 12.1 percentage points down to 78.2 percent within the space of two quarters. That is 8.4 percentage points below the average over the last ten years. In textiles, capacity utilisation increased but was still 6.1 percentage points below the long-term average. Capacity utilisation was unusually high among producers of data processing equipment (90.8 percent), electronic devices (88.4 percent) and machinery manufacturing (89.8 percent). Capacity utilisation also remained high in chemicals (84.7 percent) and in the metalworking industry (84.6 percent), although the latest figures for metalworking show a slight drop.

Sales in manufacturing exaggerated by low base level In the third quarter 2021, sales in the manufacturing sector rose by a slim one percent compared to the same period last year, following a leap of 23.2 percent in the second quarter. Domestic sales stagnated. With a strong growth in sales to third countries of five percent, foreign sales overall rose two percent. While sales in July and August were higher than in the previous year, September sales were 2.5 percent lower year on year. For the first nine months of 2021, sales increased by 11.2 percent compared to the same period last year (domestic sales: up 8.1 percent; foreign sales: up 12.2 percent).

10

Exports much lower than expected | BDI downwardly adjusts GDP growth forecast for the year to just 2.5 percent 17/12/2021

Among the individual industries, the strongest growth in sales in the first nine months of the current year was recorded by the timber industry (up 24.9 percent), metal production and metalworking (up 22.9 percent), and in chemicals (up 18.7 percent). The electrical and electronics industry, the paper industry and pharmaceuticals also recorded double-digit growth in sales as of September. High singledigit growth in sales was reported by the building materials industry, machinery manufacturing and the textiles and clothing industry. Sales in the food, drinks, and tobacco industry and in other transport equipment dropped slightly in the same period, going down by 1.4 percent and 3.5 percent respectively according to the Federal Statistical Office.

Manufacturing revenue* January till September 2021 Wood processing

24.9

Metal production and metalworking sector

22.6

Chemical industry Electronic industry

18.7 16.7

-3,5

Motor vehicle production

15.2

Pharmaceuticals

14.7

Manufacturing

12.2

Paper and pape

10.4

Glass, ceramics, stone, industrial minerals

9.0

Machinery manufacturing

7.8

Textiles, fasion, leather

6.8 -1.4

Food, beverages, tobacco Other transport equipment production

-3.5

*change in percent, year on year Source: Federal Statistical Office

Business climate: partial lockdown wearing down sentiment In November 2021, the ifo business climate index for Germany dropped for the fifth successive time. Current business and business prospects both dropped by 1.2 index points. While the majority of companies surveyed were still optimistic about their current business situation, most companies were pessimistic about the next six months. Looking at the individual sectors, sentiment in services deteriorated tangibly. With a reduction of 5.1 index points, it was the steepest drop recorded by services since November 2020. The fourth wave of infections has drastically lowere d prospects in tourism and catering. Services were also unsatisfied with current business. The climate index for wholesale and retail also pointed down due to more pessimistic prospects in the sector even though current business saw a slight improvement. Retailers are worried about supply problems and rising prices. The business climate for mainstream construction also clouded over somewhat.

Although a clear majority of construction companies were satisfied with current business, prospects for the coming six months dropped off for the first time since spring 2021. In manufacturing, the business climate deteriorated for the fifth consecutive month, with companies in the sector less satisfied with current business. Rays of hope are the export prospects, which recovered slightly following a steep slide in October, and business prospects which improved for the first time in seven

11

Exports much lower than expected | BDI downwardly adjusts GDP growth forecast for the year to just 2.5 percent 17/12/2021

months. The ifo economic barometer for manufacturing is still in the boom quadrant but has continued to edge closer to the downturn quadrant.

ifo Business-Cycle Clock German manufacturing*

30

Jan 2011

Business expectations for the next six month

Aufschwung

Boom

20 10

November 2021

Jan 2021

Jan 2010

0 Jan 2019

Jan 2020

-10 -20 -30 -40

Jan 2009

-50 Reccession

Downswing

-60 -60

-50

-40

* Balances, seasonally adjusted

-30

-20

-10

0

10

20

30

40

50

60

Assesment of current business situation

Source: ifo Institut

Outlook After managing to regain a foothold over the summer, the German economy slowed down towards the end of the year with the pandemic additionally curbing activity once again. While commodity and supply shortages hampered wide sections of the manufacturing industry, the services sector became the engine of growth over the summer. Apart from corporate service providers and other service providers, gross value added was above pre-crisis levels in all other service industries for the first time since the start of the pandemic in the third quarter of this year. However, as the constraints on industry outweigh the positive performance of services, we are partially revising our growth forecasts from September this year (Quarterly Report Germany III/2021).

Private consumption spending recorded a strong recovery in the summer months following a weak first quarter. Quarter on quarter growth rates of 3.6 percent in the second and five percent in the third quarter more than compensated for the weak start to the year. In contrast to last year when vaccines were not yet widely available and consumption opportunities were severely limited, the restrictions this year should remain low. Consumer research organization GfK nonetheless recorded a significant deterioration of consumer sentiment in November on account of the fourth wave of the pandemic.

However, consumer sentiment is still considerably better than one year ago. Furthermore, the situation on the labour market eased up markedly over the summer. The number of people in employment

12

Exports much lower than expected | BDI downwardly adjusts GDP growth forecast for the year to just 2.5 percent 17/12/2021

subject to social security contributions surpassed pre-crisis levels already in June. We therefore expect private consumption spending to increase by 0.5 percent compared to last year. State consumption expenditure rose by a good three percent in the first three quarters of the year, which is lower than what we expected. With no major changes in state consumption spending on the cards for the rest of the year and based on the figures for the year so far, we now expect state consumption to increase by only 3.6 percent. For 2021 overall, this would result in an increase in consumption expenditure of 1.4 percent.

BIP forecast for 2021: Change in real economic output over the previous year in percent

2021

Federal Government 2021

European Commission 2021

- 4.6

2.5

3.5

2.7

- 3.2

1.4

-

-

- Private Consumption

- 5.9

0.5

0.3

0.0

- Public Consumption

3.5

3.6

3.6

3.0

- 2.2

2.9

2.6

2.4

-11.2

6.0

5.5

5.4

- Construction

2.5

1.5

1.4

-

- Other

1.0

1.0

1.5

-

Exports

- 9.3

8.0

8.6

7.8

Imports

- 8.6

7.5

9.2

8.6

Net Exports, Economic Output

- 0.8

0.8

0.3

0.2

Actual figures 2020 GDP, real Consumption

Investment - Machinery and Equipment

BDI

Sources: Federal Statistical Office, Federal Government (October 2021), European Commission (November 2021), own calculations

The data of national accounts for investment in plant and equipment shows an increase of just over six percent in the first three quarters of the year compared to the same period last year. According to the latest figures, quarter on quarter growth has even turned negative. With capacity utilisation falling slightly across most manufacturing industries at the start of the fourth quarter, there are several indications that investment activity will slow down towards the end of the year. We are therefore downwardly revising our growth forecast from September and now expect investment in plant and equipment to increase by only six percent. Construction investment gathered pace following a weak start to the year due to bad weather and was well up on last year in the second and third quarter. The factor restraining the construction industry was primarily the shortage of material and personnel. Given

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Exports much lower than expected | BDI downwardly adjusts GDP growth forecast for the year to just 2.5 percent 17/12/2021

that the capacity utilisation of machinery is still on a very high level, the shortage of materials has recently improved, and demand is robust with order books nicely full, we are upwardly adjusting our growth forecast for this sector. We now expect construction investment to increase by 1.5 percent.

Investment in other assets (software, research and development) did not grow as much as we expected in the first three quarters of the current year, so we are downwardly revising our growth forecast here to one percent. Overall, this would result in an increase in gross fixed capital formation of 2.9 percent over the previous year.

Trends in exports have diverged recently. The latest figures for the export of services shows a robust upturn. Supply bottlenecks in the automotive industry, on the other hand, have kept the export of goods down to only a slight rise. With less goods exported than we expected, we are downwardly adjusting our forecast somewhat. For 2021 overall, we now expect an increase in the export of goods and services of eight percent in real terms. In the first nine months of the year, imports slightly outperformed exports. Travel picked up over the summer as restrictions were lifted. Another factor pushing up the value of imports is the surging prices of commodities and energy. We are therefore upwardly revising our forecast for imports to an increase of 7.5 percent for 2021 overall.

All in all, we expect gross domestic product for the current year to come in at only 2.5 percent over last year in real terms. Our forecast is based on the assumption that, even though the number of new cases has risen sharply just recently, economic activity will not be impeded by precautionary measures to stem the pandemic to the same extent as it was in the fourth quarter of last year. If, contrary to our expectations, a total lockdown is imposed, GDP growth will probably be even lower.

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Exports much lower than expected | BDI downwardly adjusts GDP growth forecast for the year to just 2.5 percent 17/12/2021

Sources BDI (2021). Quarterly Report Germany III / 2021. Recovery losing steam | Pre-crisis levels within reach by yearend. 20 September 2021. Berlin

Imprint Bundesverband der Deutschen Industrie e.V. (BDI) Breite Straße 29 10178 Berlin T: +49 30 2028-0 www.bdi.eu Author Thomas Hüne T: +49 30 2028-1592 t.huene@bdi.eu Editorial/Graphics Dr. Klaus Günter Deutsch T: +49 30 2028-1591 k.deutsch@bdi.eu Marta Gancarek T: +49 30 2028-1588 m.gancarek@bdi.eu

This Quarterly Report Germany is a translation based on „Quartalsbericht Deutschland IV / 2021“ as of 9 December 2021.

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Exports much lower than expected | BDI downwardly adjusts GDP growth forecast for the year to just 2.5 percent 17/12/2021

Basic data for national accounts GDP (price, seasonally and calendar adjusted) Change over previous period in percent 2020

2021

2019

2020

Q3

Q4

Q1

Q2

Q3

1.9

-3.2

8.3

-1.7

-4.0

4.0

3.5

-Private Consumption

1.6

-5.9

11.5

-2.7

-5.3

3.8

6.2

-Public Consumption

3.0

3.5

1.5

0.8

-1.0

4.6

-2.2

1.8

-2.2

4.6

2.4

-0.7

1.2

-2.2

-Machinery and Equipment

1.0

-11.2

16.7

1.9

-0.3

0.4

-3.7

-Construction

1.1

2.5

-0.9

2.9

0.1

1.8

-2.3

-Other

5.5

1.0

2.8

1.7

-2.7

1.0

0.9

Domestic Demand

1.8

-4.0

5.6

-0.3

-1.0

2.8

2.0

Exports

1.1

-9.3

17.5

4.6

1.3

0.6

-1.0

Imports

2.9

-8.6

9.3

2.7

4.1

2.2

-0.6

Total

1.1

-4.6

9.0

0.7

-1.9

2.0

1.7

1.4

-2.3

6.2

-1.2

-2.9

2.9

2.5

-Private Consumption

0.8

-3.0

5.8

-1.4

-2.6

1.8

3.0

-Public Consumption

0.6

0.7

0.4

0.2

-0.2

1.0

-0.5

0.5

-0.8

1.0

0.5

-0.1

0.3

-0.5

-Machinery and Equipment

0.0

-0.9

1.0

0.1

0.0

0.0

-0.2

-Construction

0.4

0.2

-0.1

0.3

0.0

0.2

-0.3

-Other

0.1

0.0

0.1

0.1

-0.1

0.0

0.0

Change in stocks

-0.7

-0.7

-1.8

0.5

2.1

-0.5

-0.1

Domestic Demand

1.7

-3.7

5.5

-0.2

-0.9

2.6

1.9

-0.7

-0.8

3.6

1.0

-0.9

-0.6

-0.2

Consumption

Investment

Contribution to growth (in percentage points) Consumption

Investment

Net exports

Source: Federal Statistical Office

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