German economy resilient despite poor conditions

"The sideways trend that we feared since the beginning of the year continues," said Ilja Nothnagel, a member of the DIHK executive board responsible for economic analysis, during the presentation of the figures on May 22 in Berlin. "There are still no signs of a broad-based upturn."

Despite the persistently high energy prices, rising interest rates, and the war in Ukraine, companies have shown remarkable resilience, according to Nothnagel. "However, the outlook for the next twelve months remains overall bleak, especially since incoming orders are noticeably declining on the demand side. DIHK continues to expect zero growth this year."

Despite some slight improvements, the economic situation of companies in Germany remains stagnant, Nothnagel further reported. "In addition to the cyclical risks for companies, the long-term structural challenges for the economy are increasingly coming to the forefront."

Energy and raw material costs remain the top risk

Companies still consider energy and raw material prices as the greatest business risk, albeit with a slightly decreasing trend: Currently, nearly two-thirds of companies (65 percent) perceive them as a threat to their business, down from 72 percent at the beginning of the year.

However, the shortage of skilled workers and labor costs are becoming increasingly prominent. Three out of five companies (62 percent, up from 60 percent) identify the shortage of skilled workers as a business risk. This represents a record high, previously reached only in autumn 2018. In the service sector as well, the shortage of skilled workers has regained the top spot as the most frequently mentioned risk, surpassing energy and raw material prices.

"The shortage of skilled workers now ranks as the second largest business risk for companies," warned Nothnagel. "Given the aging of society, the lack of qualified labor will remain one of the significant structural challenges for companies in the future. Increased energy and material costs, as well as rising labor and financing costs – the entire package of current inflation – significantly pressures the finances and margins of companies."

Shortage of skilled workers and inflation fuel labor costs

The second risk that is increasingly prominent is labor costs. Due to the persistent shortage of skilled workers and the rising inflation, more than half of the companies (53 percent, up from 49 percent) consider labor costs as a business risk, reaching a new record high.

Some service sectors with below-average wage levels, which suffered significant personnel losses during the Covid-19 pandemic and now have a high demand for labor, particularly emphasize labor costs as a risk – such as the gastronomy sector (73 percent, up from 68 percent), the taxi industry (67 percent, consistent with 68 percent), and the security industry (65 percent, down from 73 percent).

With regard to the coming months, business expectations have slightly improved in early summer but remain cautious overall. The balance (the difference between positive and negative expectations) increases from minus 14 points to minus 5 points. "The reason for the slight improvement is that energy prices have stabilized and even decreased recently. In addition, supply bottlenecks are diminishing," explained Nothnagel. "We are still well below the long-term average of plus 5 points. There are still more pessimistic companies than optimistic ones."

Companies assess the current business situation unchanged compared to the previous survey. Like at the beginning of the year, 34 percent of companies describe their situation as "good." 51 percent consider their current business situation as "satisfactory." 15 percent of companies describe their situation as "poor." The resulting balance between "good" and "poor" responses remains at 19 points, slightly below the long-term average of 21 points.

The retail sector suffers from a lack of consumer sentiment and disruptions in supply chains

Looking at the industries, it becomes evident that companies in the retail sector report a deterioration in their situation. Only a little over a quarter of retailers (26 percent, down from 30 percent) consider their business to be good, while nearly a fifth assess their current situation as poor (19 percent, up from 18 percent). This reflects the cautious consumer sentiment due to inflation, ongoing disruptions in supply chains, and cost pressures resulting from high purchase prices.

Ilja Nothnagel demands: "Overall, we must conclude that the German economy lacks momentum. Currently, the global economy and domestic demand are not providing the impetus we need. Strengthening the local business conditions is necessary. We urgently need new impulses for private investments, as well as infrastructure development. Planning processes must be accelerated. The biggest problem identified by companies in our survey is bureaucracy. These are all conditions that we have control over. It is crucial for the government to take action."

The complete survey results are available for download here:

DIHK Economic Survey Early Summer 2023 (PDF, 708 KB)