A giant in very low hours. The once all-powerful German industry, a true national pride, continues to wither away. The latest drama was the announcement of the closure of factories by Volkswagen, the jewel of its prestigious automobile industry, in the country itself, which is unprecedented. A real blow under which circulate data that do not invite optimism at all and that increasingly underlie great fear: the economic locomotive has been stopped for some time and does not really show signs of starting. The latest industrial production data were once again particularly revealing. The sharp drop in the indicator in July leads to an existential crisis in the sector and telegraphy that, after contracting in the second quarter, the German economy could fall back into a technical recession (two consecutive quarters of GDP contraction) in the third. a situation that was already dominant last year.
THE Industrial production down 2.4% in July This was much worse than expected (stagnation was expected anyway). Data released on Friday by Destatis, Germany’s federal statistics agency, left output 2.2% below its average level in the second quarter and 9.5% below its most recent peak in February 2023. The decline in output was broad-based across all sectors, with particularly sharp declines in the production of automobiles (-8.1% month-on-month) and electrical equipment (-7.0%), two of the largest sectors of German industry. Output in energy-intensive industries, which had been trending upwards in recent months, fell 1.8% month-on-month and remained well below its pre-Ukraine war peak. And while output in construction increased (+0.3%), it remained very weak.
Over the year, industrial production fell by more than 5%. The construction sector appears to continue to bottom out with a second consecutive weak monthly growth. At the same time, German exports recovered somewhat, increasing by 1.7% month-on-month compared to -3.4% in June. With imports increasing by more than 5% month-on-month, the German trade surplus fell to €16.6 billion from €20.4 billion in June.
“While this significant decline is likely to be partly due to the timing of the summer holidays, it does signal a weak start to the third quarter for the manufacturing sector. As recent confidence indicators suggest there will be no quick turnaround for the better, it is a Growing risk that German economy will continue to contract slightly in the third quarter, despite exports performing somewhat better than expected,” Commerzbank economist Ralph Solveen said in a commentary to clients. Although the analyst expects some rebound in August, the deterioration in confidence given economic uncertainty raises fears of a decline in output in the third quarter, increasing risks for the German economy heading into the third quarter, after a 0.1% decline in the second.
Thursday, the Ifo Institute has significantly lowered its forecasts for this year and next. It now expects zero growth in 2024, compared to 0.4% previously, and only 0.9% in 2025, compared to 1.5% previously. It Kiel Institute for World Economics is even more pessimistic: he announced this week that gross domestic product would contract by 0.1% this year, after a contraction of 0.3% in 2023.
“We expect German GDP to increase slightly in the second half of 2024, mainly because the services sector gains momentum on the back of rising real incomes. However, there is a growing risk that activity in the second half will not be strong enough to achieve a positive annual growth rate,” says Martin Ademmer of Bloomberg Economics.
The small sparks in the manufacturing sector are fading fast. This week, it was reported that industrial orders rose 2.9% month-on-month in July, beating expectations. But that was mostly due to large orders, which tend to be volatile. Excluding them, orders fell 0.4% month-on-month and remained at one of their lowest levels since the pandemic.
“The weakness in German industry is one of the main reasons why we expect a broad-based stagnation in the German economy for the rest of the year,” said Franziska Palmas, an analyst at Capital Economics. “Today’s data is a cold shower for anyone who was hoping for a quick recovery. In fact, it suggests that the sector’s recovery still has a long way to go. or even a sharp increase in contraction,” acknowledged Carsten Brzeski, chief research strategist at ING.
“German industry has been the best example of the problems of the entire economy in recent years: caught between cyclical and structural headwinds and finally realizing that the old macroeconomic model of cheap energy and access to large, easily accessible export markets no longer works. That is why, even four and a half years into the pandemic, German industrial production is still more than 10% below its pre-pandemic level. Capacity utilization in manufacturing is at its lowest level since 2020. Only in food and clothing production. Capacity utilization is currently at historical averages. Not exactly a rosy picture for an industrial powerhouse,” Brzeski makes clear in a note to clients.
According to Timo Wollmershäuser, head of economic studies at Ifo, “the German economy is stagnating and not growing in this slowdown, while other countries are experiencing a rebound.” “We have a structural crisis. There is very little investment“In particular in industry, productivity has been stagnating for years. In addition, we are facing a cyclical crisis. The order situation is bad and the increase in purchasing power is not translating into greater consumption, but rather into greater savings, because people do not feel secure,” he added in the institute’s latest report.
“This week’s news from Germany should have finally drawn the attention of an entire country to the fact that years of stagnation, underestimation of technological trends and international competition are not without consequences. Today’s macroeconomic data do little to change this picture,” the analyst laments. Bundesbank President Joachim Nagel said on Tuesday that the contraction in the spring should be a “wake-up call” and that “current economic reports clearly show that some sectors are under pressure.”
However, no one seems to find the key and the feeling of pessimism and stagnation is growing, affecting politics. The ruling coalition of Social Democrats, Greens and Liberals is plagued by instability and internal conflicts. Added to this are setbacks such as the court ruling that brought down its ambitious investment fund. News such as the victory of the far-right (the Alternative for Germany party) in the regional elections in Thuringia add even more uncertainty.
The end of the cheap russian energy for the war in Ukraine, loss of competitiveness against China coupled with Beijing’s greatest apprehensions, the high interest ratesyears of few investors -especially the infrastructure- and a start demographic crisis -it has already been checked labor shortage In some areas, the slabs are too heavy. One wonders whether start of rate cuts by the European Central Bank (ECB) could provide the desired impetus.
“Decarbonization, digitalization, demographic change, the coronavirus pandemic, the energy price crisis and China’s changing role in the global economy are putting pressure on established business models and forcing companies to adapt their production structures,” says Ifo’s Wollmershäuser. “And the population is aging faster, with fewer and fewer people working. The shift from the industrial sector to the service sector is largely responsible for the stagnation in productivity in recent years,” he adds.
Looking to the future, with the US and Chinese Economies Lose Momentumwith the new trade tensionsThere is little hope for a strong export-led recovery. In addition, high inventory levels and precautionary savings continue to weigh on the economy. As if this were not enough, the growing number of bankruptcies and individual company announcements of upcoming job restructuring continue to pose a significant threat to the labor market.
