The German economy in January 2023 – of(f) to a promising start?

It is quite interesting how fast situations and perceptions can change: While I thought in the summer 2022 that we were nearing a recession in 2023, a silver-lining already occured in October (here) which got even brighter in November (here) and December 2022 (here). Hence, the question now is, will we be able to avoid a recession alltogether? In order to assess the situation, let’s take a closer look on how the German economy fared in January 2023:

The German economy, which according to first assessments grew by 1.9% in 2022 (here, which I already noted last month) might not have fared so relatively well at last: Destatis had to correct its reading from the 4th quarter 2022 to -0.4% down from the -0.2% originally reported. It reamins to be seen how this revision will affect the actual German GDP in 2022, but a rather moody end to a year usually does not make for a promising first quarter of the following year.

The German DAX had a flying start to the year: After taking a break from its relentless rise during December, the index, starting at 14,116 points on 3rd January and closing the month at 15,081 points on 31st January 2023, gained 965 points over the course of the month.

German industrial orders, does not have took off again: after 0.8% (MoM, but -3.2% YoY) in October, -5.3% (MoM, even -11.0% YoY!) in November, they gained 3.2% (MoM, but -10,1% YoY) 2022. There against, Germany’s industrial production, shrank in the same month: after -0.1% (MoM, and stalled (0.0%) YOY) in October, production grew by 0.2% (MoM, but -0,4% YoY) in November but decreased by -3.2% (MoM, and even -3,9% YoY) in December 2022. Also, German exports, further declined, after -0.6% (MoM, but +14.2% YoY) in October, -0.3% (MoM, but +13.3% YoY) in November, exports decreased by a further -6,3% (MoM, +5,9% YoY) in December 2022. By the way, if you are interested in other German KPI’s, have a look at the “Destatis Deutschland”-Dashboard (here) which indeed presents a good overview of certain key figures.

The German Target 2 balance, lost some Euro 107bn in the course of January 2023 and ended at Euro 1,162bn. The German inflation-rate, which lately managed to “lose” its two-digit status, regained some percentage-points lately: starting from 1.0% in January (2021) to 1.3% in February, to 1.7% in March, to 2.0% in April, to 2.5% in May, to 2.3% in June, to 3.8% in July, to 3.9% in August, to 4.1% in September, to 4.5% in October, to 5.2% in November and to 5.3% in December 2021, 4.9% in January (2022), 5.1% in February, 7.3% in March, 7.4% in April, and, after 7.9% in May, decreasing to “only” 7.6% in May and even to 7.5% in June, increasing to 7,9% in August, to 10.0% in September and even 10.4% in October, the rate decreased to 10.0% in November and further to 8.6% in December 2022, but increased to 8,7% in January 2023 (each YoY; cf. my most recent evaluation here, in German). So, let’s see how that one is going in the next months.

The German labor market remains robust, although unemployment rose by 162,000 and the unemployment rate – after 5.3% in October, 5.3% in November and 5.4% in December 2022 – further rose to 5.7% in January 2023. After three consecutive months of increase (+18.4% in October, +1.2% in November and +3.1% in December 2022), insolvency filings in Germany declined by -3,2% in January 2023. However, this seems to be mostly due to the steady decline of consumer filings – which are also included in the aforestated figures. However, first assessment indicates that corporate insolvencies are on the rise (cf. my most recent comment, here, in German).

The leading German sentiment indicators remained in sync for January 2023: the German (Industrial) Purchasing Managers’ Index (PMI) gained another 0.2 points and stood at 47.3 points on 1 February 2023. Sadly, there is no new ZEW Indicator (for the current situation), so the January issue, in which the indicator gained 2.8 points and rose to -58.6 points, still stands. The ifo Business Climate Index, alsorose from 86.3 points in November to 88.6 points in December 2022, to 90.2 points in January and now to even 91.1 points in February 2023.

To sum up: For me it is not really easy to get a handle on the current state of the German economy (which I did try here in a longer piece already (in German)). While, again and again, the hard facts (of industrial orders, production and exports) point to a downward direction, the sentiment is definitely getting better each month. As already assumed in the last month, one part of the explanation might indeed be the massive volume of state-aid programs which seem to take some pressure from the economy. As stated already last month, the positive sentiment therefore might be justified – short term. The question remains, what could be the initiator to allow for a (healthy) growth of the German economy once the programs run out. The current measures taken to get combustion engines off the European Roads in the nect decade (cf. here) will rather hamper the cornerstone of the German economy – the automotive sector. So, who will take over the steering wheel and push the growth? The Germany prosperity depends on the answer to this question.

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