Economy

"The upturn in business sentiment is faltering. The expectations component of the business climate has fallen, presumably because risks to economic development remain high. This also includes the increased support for populist parties at home and abroad, as the European elections at the beginning of the month showed. Populism could have a particularly negative impact on an export-oriented country like Germany in the longer term. The current uncertainty could also be linked to the upcoming parliamentary elections in France. The outcome of the US presidential elections in November will be at least as relevant."

“The labour market is still holding up well in the economic downturn. This is helped by the fact that companies are reluctant to lay off scarce skilled workers. I expect the unemployment rate to rise only moderately from 5.7% in 2023 to 5.8% in 2024. That corresponds to 2.7 million unemployed this year. The number of people in employment has continued to rise since the beginning of the year, albeit at a much slower rate than in the same period last year. For 2024 as a whole, I expect an increase of 130,000 to a new record level of 46.1 million people in employment. The early indicators suggest a slight economic recovery over the course of the year, which will be largely driven by private consumption, which is benefiting from increases in real wages. The fall in real incomes last year is likely to be partially offset this year. The number of registered vacancies has fallen by 65,000 since last year to 702,000 in May. However, the shortage of skilled labour is still at a historically high level and significantly more companies will be affected again in the coming years. There is therefore still an urgent need to increase labour force participation and skilled immigration and to strengthen labour productivity growth.”

“European inflation accelerated again somewhat in May. Today's data on consumer price trends are the last before the ECB's upcoming Governing Council meeting and are therefore the focus of attention. Despite the pick-up in the pace of inflation, the ECB will almost certainly be the first of the major central banks to start cutting interest rates. On the one hand, significant base effects in energy goods are partly responsible for the stronger rise in prices, and on the other hand, the members of the Council have already made it clear with broad consensus that the ECB has increasing confidence in the medium-term decline in inflation. However, it remains to be seen what will happen to interest rates after the summer. For further easing steps, the ECB will want to see in the data above all an easing of price pressure in services.”

“Things are getting bumpy. Prices in Germany rose faster again in May. The price of services rose particularly sharply by 3.9%. The fact that the inflation-dampening effect of the 49-euro ticket introduced a year ago is no longer being felt is noticeable here. However, continued strong wage growth is also delaying a further slowdown in price increases. At the same time, the annual inflation rate for energy remained in negative territory thanks to the easing on the oil market. Price pressure from the upstream economic levels remains weak and wage increases are expected to moderate over the course of the year. This is suggested by the continuous decline in wage growth in job advertisements. We are therefore raising our inflation forecast only slightly to 2.6% for this year and 2.2% for next year.”

“The exceptionally gloomy mood in German companies just a few months ago is slowly giving way to a little more confidence. Although the business climate stagnated in May, it remains at a significantly higher level than at the beginning of the year. All in all, the economic trough should be largely over. After the slight contraction in GDP last year, we expect a return to moderate real growth of +0.3% in our brand new spring forecast for the current year, which will then pick up significantly to +1.2% in 2025.”

“The German economy returned to a modest growth rate in the past quarter. The good production data already announced this a few weeks ago, even though the sentiment indicators in the first quarter were still predominantly gloomy. In the meantime, however, sentiment indicators have also improved, meaning that there are signs of an economic acceleration on all sides. Nevertheless, the structural challenges remain, particularly due to demographic ageing, decarbonization and the intensified competitive environment in many areas.”

“The start of the interest rate turnaround is approaching in the eurozone. I expect the deposit rate to be lowered in July at the latest. Overall, consumer price inflation remained unchanged in April. However, the fact that services inflation has eased after a five-month standstill is likely to be more important for the ECB. At the same time, the growth environment in the eurozone suggests that inflation remains on target. Although gross domestic product surprised on the upside in the first quarter and sentiment has recently brightened somewhat, the European economy is likely to be slow to pick up speed. This suggests limited domestic price pressure. However, the development of energy prices remains a risk factor for inflation and the economy due to the ongoing geopolitical tensions.”

“In the US, the interest rate turnaround is likely to be delayed. Three negative inflation surprises in a row are too many for the Fed. Driven by services, price pressures have consistently regained strength in recent months. In the run-up to the upcoming FOMC meeting, Fed Chairman Powell already made it clear that the desired clarity regarding a sustained convergence of inflation towards the 2% target had failed to materialize. The robust economy, in particular the strong labor market, also relieves the Fed of the urgency to start easing. The probability of an interest rate cut before the summer break has therefore decreased significantly.”

“At the April meeting of the ECB, the majority of Council members will probably vote for unchanged key interest rates. However, the significant progress made in the fight against inflation opens up scope for an early easing of monetary policy. I believe a reduction in the deposit rate by 25 basis points before the summer break is very likely, provided the data for the coming months underpins the trend back towards sustained price stability. In addition to a decline in wage growth, a noticeable slowdown in services inflation, which has been stuck at 4% since November, is particularly important. Services are so relevant for the development of inflation because they account for around 45% of the consumer basket. In recent months, these stubbornly high price increases have been offset by falling inflation for food and industrial goods. During this period, the inflation-dampening effect of falling energy prices has already weakened noticeably, and should be history by May at the latest. It could even happen sooner, as geopolitical tensions and a restrictive OPEC+ policy are currently pushing up the oil price.”

“We continue to approach the inflation target with small steps. The slowdown in consumer price inflation persists in March. However, the last mile remains an arduous affair. The fall in energy prices, which has had a strong dampening effect in recent months, is slowly crumbling away. At the same time, services are still becoming much more expensive. However, the sales price expectations of service providers have fallen recently and the pace of wage increases has also slowed somewhat. Only if these positive developments continue and are reflected in prices to a sufficient extent will the ECB consider the conditions for a first interest rate cut in the summer to be fulfilled.”

“The economic outlook for the German economy is better than the current mood. The data on wage developments reported today confirm the assessment that private consumption should sustain a moderate economic recovery. The gap between inflation and nominal wage growth is visibly closing. A more significant increase in real wages can be expected at the end of the year. Driven by high price increases and the shortage of skilled workers, employees will receive the highest nominal wage increases in 30 years in the current year. On average, collectively agreed wages are expected to rise by more than 5% in 2023. A smaller increase is expected for next year. However, at around 2.5% (HICP), inflation in 2024 is likely to be much lower than in the current year, for which I expect average inflation of 6.3%. Subdued aggregate demand limits the scope for further price increases, and prices for both energy and food have already stabilised since the winter. If this development continues, real wages will rise noticeably again next year. This also gives rise to cautious optimism for the economy. In 2024, German GDP should therefore grow again after a decline of 0.4% this year, albeit only moderately at 0.8%.”

"The US economy grew by 2.4% on an annualised basis in the second quarter. The US economy is proving resilient despite the Federal Reserve's aggressive turnaround on interest rates. Stable consumer spending and nonresidential fixed investment had a positive impact. However, I continue to expect rising interest costs to slow economic activity in the second half of the year. Sentiment in the manufacturing sector has already deteriorated noticeably and the labour market, which has been clearly overheated lately, seems to be slowly cooling down somewhat. Workers will feel the impact, which will weigh on consumer spending in the coming months. However, on Wednesday, in parallel with the expected interest rate hike of a further 25 basis points, the U.S. Federal Reserve changed its assessment of current U.S. growth from "modest" to "moderate". The Fed now probably assumes that it only needs an economic dip – and not a recession – to push inflation further toward the two-percent target. This means that the US economy could come out of this interest rate cycle with a black eye.”