German private sector hits new recession lows amid job cuts

The German private sector has entered a deeper recession, with companies laying off employees at a rate not seen since the COVID-19 pandemic—and excluding that period, not seen in 15 years. Experts are pointing to a dramatic downturn in the manufacturing industry and concerns about the future of the entire economy.

A troubling trend has emerged in the commentary on the latest PMI data for Germany. Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, highlights a worrisome phenomenon in the German labor market.

Companies are reducing employment at a pace not seen since the COVID-19 pandemic in 2020. Excluding the pandemic period, the current rate of layoffs is the fastest in more than 15 years, emphasizes the expert in his analysis.

De la Rubia points out that "the slowdown in the manufacturing sector has deepened again, dispelling any hopes for a quick recovery. Production fell at the fastest rate in a year, with new orders collapsing." The economist notes that "several large suppliers of the automotive industry have announced significant job cuts." In his view, "these worrying data are likely to intensify the ongoing debate in Germany about the risk of deindustrialization and what the government should do about it."

The Hamburg Commercial Bank expert highlights the dramatic deterioration in sentiment in the German industry. "Optimism is a thing of the past. Manufacturers are downright depressed about their future activity, and expectations for the coming year have plummeted," writes de la Rubia. He emphasizes that "in a striking change, the moderate optimism from August quickly transformed into the deepest pessimism in a year in September." The economist links this shift to "the wave of negative reports around Volkswagen, which cast a shadow over the entire industry."

De la Rubia also points to the problems of the manufacturing industry spilling over into the services sector. "The collapse in production is beginning to affect the previously resilient German services sector. Activity growth among service providers slowed for the fourth consecutive month, approaching stagnation," reads the expert's commentary. The economist adds that "in response to weakening demand, companies are continuing to reduce employment." De la Rubia assesses that "the outlook for the services sector does not look good. Order backlogs shrank at the fastest rate in seven months, while new orders showed a clear decline."

According to Hamburg Commercial Bank's chief economist, "a technical recession seems inevitable." De la Rubia explains that "our current GDP nowcast for the current quarter, which incorporates HCOB PMI among other indicators, now indicates a decline of 0.2 percent compared to the previous quarter. In the second quarter, GDP already shrank at a rate of 0.1 percent." However, the economist adds that "there is still hope that the fourth quarter will be better, as higher wages coupled with lower inflation should increase not only real incomes but also consumption, supporting domestic demand."

The latest PMI data for Germany, published on September 23, 2024, show a deepening of economic problems for Europe's largest economy. The combined PMI index for manufacturing and services fell to 47.2 points in September from 48.4 in August, reaching the lowest level in seven months. A value below 50 points indicates contracting economic activity.

The data from the manufacturing sector look particularly worrying. The PMI index for manufacturing fell to 40.3 points from 42.4 in August, reaching the lowest level in 12 months. The manufacturing output subindex dropped to 40.5 points from 42.8 the previous month, also hitting a 12-month low.

The services sector, which has so far supported the German economy, is also showing signs of weakening. The PMI index for services fell to 50.6 points from 51.2 in August, reaching the lowest level in six months. Although it is still above the 50-point threshold, it is approaching the level of stagnation.

Experts from the Institute for Employment Research (IAB) in Nuremberg are raising alarms about increasing pressure on the job market in Germany. The latest IAB forecast indicates serious consequences of the upcoming recession for the employment situation.

According to the latest IAB report published on September 23, 2024, the German economy is experiencing increasingly strong slowdowns, which directly translate into the job market situation. The institute predicts that in 2024, the number of employed people will grow by only 170,000, and in 2025 by just over 180,000, reaching a record level of 35.12 million people.

The IAB points out that this slight increase in employment is mainly due to the public sector and the growing number of part-time jobs. At the same time, the industrial sector is recording a decline in the number of employees, and the number of full-time workers with social insurance is decreasing in both forecasted years.

The IAB report reveals a troubling trend in the German job market. Unemployment in Germany is rising—in 2024, the average annual number of unemployed people is expected to increase by 170,000, reaching 2.78 million, and in the following year by another 61,000, to 2.84 million unemployed.

IAB expert Enzo Weber points to the record level of part-time employment. "In the first quarter of 2024, the percentage of people working part-time reached an unprecedented level of 39.1 percent, an increase of 0.3 percentage points compared to the same period a year earlier," emphasizes Weber in the institute's report.

The increase in part-time work is directly related to the weakening of the industrial and construction sectors. IAB experts point out that these branches of the economy, traditionally offering stable full-time employment, are currently facing serious difficulties, forcing employers to limit working hours.

The problems of the German economy and job market are particularly evident in the situation of Volkswagen, Germany's largest car manufacturer. The company has implemented a rigorous savings program that could lead to layoffs and factory closures. These reports come in the context of the upcoming automotive summit organized by Economy Minister Robert Habeck on September 23, 2024.

German media suggest that the situation at Volkswagen could have serious consequences for employees. There is talk of "massive job cuts," suggesting that VW could be forced to lay off up to 30,000 employees.