The German economy in June 2022 – still prevailing optimism creates its own risks

While the war in Ukraine continued unabated (for regular updates, cf. here, in German), the German economy developed some hope in May 2022 (cf. here). Hence, the question in June is whether this optimism was and is still warranted. So, let’s take a closer look:

While the Bundesbank and the “Wirtschaftsweise” have considerably loiwered their respective expectations concerning the development of the German GDP in 2022 (to 1.9% and 1.8% respectively, the IFO Economic Forecast from 15 June 2022 still foresees a GDP growth by 2.5% in 2022 and 3.7% in 2023 (here).

While, the German DAX enjoyed a “crack-up-boom” in May, it zig-zagged its way rather steadily down from 14,478 points on 1 June, ending the month with 12,795 points on 30 June 2022, thereby losing 1,683 points or more than 10% in the course of the month.

While German industrial orders did not decline in May, they only remained in the “green” by a small margin: after -2.2% (MoM; +2.9% YoY) in February, 0.6% (MoM; and even 20.7% YoY) in March, -2.7% (MoM; -6.2% YoY) in April 2022, orders grew by only 0.1% (MoM; -3.1 YoY) in May 2022. The same goes for Germany’s industrial production, which, after declining by -3.9% (MoM; -3.5% YoY) in March and rising by 0.7% (MoM, but -2.2% YoY) in April, now only gained a marginal 0.2% (MoM, -1.5% YoY) in May 2022. Also, German exports,which had skyrocketed in the previous months (by +6.4% (MoM; and even +14.3%) in February but declined by -3.3% (MoM, but +8.1% YoY) in March and, again, by +4.4% (MoM, and even +12.9% YoY) in April) now declined, albeit only -0.5% (MoM, but +11.7% YoY) in May 2022. 

The German Target 2 balance, rose by a certain Euro 57bn in the course of June 2022 and ended at Euro 1,216bn. Against my earlier forecast, the German inflation-rate, somewhat slowed its increase in May: 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, it dcreased to “only” 7.6% in May 2022 (each YoY), but only due to some cost-lowering measures of the Bundesregierung (cf. here for more details, in German). Given the recent further increase in the US-inflation (here), my prediction still is that we will see two-digit inflation rates in Germany in the near future.

Despite the overall gloomy figures, the German labor market still keeps its robustness: Although the unemployment rate – after 5.3% in February, 5.1% in March and 5.0% in April and 4.9% in May 2022 – rose by 0.3% to 5.2% in June 2022, mainly due to the registration of Ukrainian refugees. Over all, employment grew by +335,000 in June 2022 alone according to the Bundesagentur für Arbeit. (Applications to commence) business insolvencies in Germany continued their zig-zag-course of the previous months and, after a stark rise by 27% in March, followed by a near-equal stark decline by -20.8% in April 2022, another more modest rise by 8.4% in April, declined (equally moderately) by -7.6% in June 2022 (see my comment here, in German).

Despite the rather mixed economic figures, the leading German sentiment indicators ROSE in sync: the German (Industrial) Purchasing Managers’ Index (PMI) decreased by 2.8 points and stood at 52.0 points on 1 July 2022. Also, the ZEW Indicator (for the current situation) gained 8.9 points and thus increased to -27.6 points in June 2022. There against, the Ifo business climate index, fell by -0.7 points and – after 93.0 points in May – ended at 92.3 points in June 2022.

To sum up: As some “hard” KPI of the German economy – orders, production and exports – not seem to catch up with the global situation, the labour market remains strong and business insolvencies reach another all-time low. Nevertheless, the optimism radiating from the current IFO Economic Outlook are rather disturbing then reassuring – not only due to the carnage at the stock-markets. Independently of any effects the war in Ukraine might, have, it is obvious that the western central banks will have to raise interest-rates faster and harder than anticipated in order to prevent the inflation going rampant. As in the early eighties of the last century it seems likely that an increase appropriate to curb inflation will lead to a recession. Even if a recession can be averted, it seems hardly plausible to get to a growth of more than 1.0% of German GDP in 2022, not even to think about IFO’s aim of 2.5%. And this reasoning does not even contain any “reserves” for further consequences of the war, such as a total stop of gas-deliveries out of Russia. Or the consequences of any further lockdown in China. As already stated in the previous month there is a clear and present danger that such positive outlooks prevent any useful preparation for a potential crash of the economy. The hope and optimism currently to be observed in Germany (cf. also here, in German) is totally out of the vazoo and definitely not warrranted any more.

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