• German inflation eases more than expected in June
• The Manufacturing sector remains in contraction territory
• German unemployment rises unexpectedly
• DAX 40 likely to trade higher despite economic challenges

A Surprise Decline in Inflation

German inflation fell more than expected in June, continuing its downward trend. Preliminary data from the federal statistics office showed on Monday that annual CPI eased to 2.2% in June. Analysts had forecast a slightly higher inflation rate of 2.3%, following a year-on-year increase in consumer prices of 2.4% in May.

On a monthly basis CPI rose 0.1% vs. expectations of 0.2% and on par with the prior month reading.

Impact on Economic Recovery

The slight decrease in inflation had fuelled optimism among Germans for an economic rebound by the end of the year. However, the latest uptick in inflation to 2.4% in May is a reminder that the road to lower inflation could be bumpy.

Inflation Forecast for Germany

Inflation in Germany has been on a downward trajectory since October 2022, driven by declining wholesale energy prices and the implementation of measures to counteract the impact of elevated energy costs.

However, the anticipated phasing out of these mitigating measures, coupled with higher fuel expenses, is expected to contribute to an uptick in overall inflation for the years 2024 and 2025. Additionally, sustained wage growth is likely to continue to exert price pressures in the services sector.

Overall, according to the European Commission the inflation rate is forecasted to moderate to 2.4% in 2024 and further to 2.0% in 2025, following a notable decrease from 6.0% in 2023.

German Manufacturing Sector Contracts Further in June

Germany’s manufacturing sector, which constitutes approximately one-fifth of Europe’s largest economy, declined in June, with the rates of contraction in both output and new orders reaccelerating. The accelerated fall in new orders suggests that a recovery in the manufacturing sector would be delayed.

The HCOB final Purchasing Managers‘ Index (PMI) for German manufacturing dropped to 43.5 in June, down from 45.4 in May. This confirms the preliminary flash estimate and remains below the critical 50 level that delineates growth from contraction. Over the past year PMI readings have been below 50 suggesting ongoing challenges in the sector.

Impact of Increased Competition from China

One likely explanation for the weak export orders is the increasing competition from China. As domestic demand in China remains sluggish, the country is ramping up its exports worldwide, adding competitive pressure on German manufacturers.

Labor Market Struggles

The latest data from the Federal Labour Office in Germany reveals a higher-than-anticipated increase in the number of unemployed individuals in June, underscoring the impact of economic challenges on the labour market.

In June, the number of jobless individuals surged by 19,000 in seasonally adjusted terms, surpassing the expectations of a rise of 15,000. Bei uptick highlights the persistent weakness in the labour market.

The seasonally adjusted unemployment rate climbed to 6.0% in June, up from 5.9% in the previous month.

Stagnation Followed by a Sluggish Recovery in the German Economy

In 2023, the German economy faced a recession, marked by a 0.2% decline in real GDP, according to the German Federal Statistical Office. Despite ongoing headwinds, the economy showed slight recovery at the start of 2024, raising an optimism for the rest of the year.

Throughout 2023, purchasing power saw a significant recovery. However, private consumption remained sluggish, failing to translate increased purchasing power into robust consumer spending. This sluggish consumption has been a drag on overall economic growth.

Investment continues to be a concern, with expectations that it will contribute negatively to economic growth in 2024. This trend underscores the hesitancy among businesses to commit to new capital expenditures amidst economic uncertainties.

Impact of Weak Foreign Demand on Exports

German exports are being adversely affected by weak foreign demand for capital and intermediate goods. This decline in export activity is a critical factor in the country’s overall economic performance.

Real GDP Growth Forecast for 2024

Overall, real GDP growth for Germany in 2024 is forecasted to be a modest 0.1%. This projection highlights the ongoing challenges facing the economy and the need for strategic initiatives to foster stronger growth.

Source: TradingView

DAX 40 Outlook

Despite its economic challenges the German benchmark index DAX 40 has experienced a strong rally and has gained 55% from its September 2022 low. Year to date the index has gained 10%.

The Relative Strength Index (RSI) has formed a bearish divergence over the past three months suggesting that momentum conditions are deteriorating, and the rally might run out of steam.

While over the long-term the market is likely to continue to trade higher toward the 19,500 – 20,000 zone, in the short-term gains are likely to be modest and a consolidation in the summer months could be seen.

Active traders looking for magnified exposure to the German stock market index may consider Leverage Shares +3x Long Germany 40 or -3x Short Germany 40 ETPs.