Germany's Industrial Downturn Intensifies Amidst Declining Production

08 Sep, 2023

Germany's Industrial Downturn Intensifies Amidst Declining Production

A sharp decline in automobile production has exacerbated Germany's industrial downturn, with production shrinking for the third consecutive month in July. This situation has intensified the pressure on the German government to revitalize the economy.

Germany's statistical office reported a 0.8% month-on-month decrease, surpassing economists' expectations of a 0.5% decline in a Reuters poll. The decline would have been even more significant if not for a rebound in energy and construction output in July. Notably, the carmaking sector saw a substantial 9% drop in production.

Carsten Brzeski, an economist at Dutch bank ING, pointed out, "Germany's industrial production continues its nosedive, and even the most pessimistic forecasts are becoming alarming." He calculated that the production measure was still 7% below pre-pandemic levels.

Germany, as Europe's largest economy, has faced economic stagnation or contraction for the past three quarters, lagging behind the US and the overall eurozone in recovering from the pandemic. The country's industrial core has been particularly impacted by factors like rising energy prices, increasing interest rates, and a slowdown in trade with China, its second-largest export market.

Ralph Solveen, an economist at German lender Commerzbank, noted that the ongoing decline in industrial production has affected "all manufacturing groups," implying that it is likely to contribute to a"Decline in Germany's Economic Activity Expected in the Latter Half of the Year."

Adding to the concerns, the EU's statistics office reduced its official estimate for eurozone growth in the second quarter from 0.3% to 0.1%. This adjustment follows similar reductions in growth estimates by Italy, Ireland, and Austria, further emphasizing the eurozone's lag behind the US, which saw a 0.6% increase in gross domestic product during the same period.

There are growing concerns about German industrial companies relocating production overseas. For instance, BASF, the country's leading chemicals company, opted to build a new €10 billion petrochemicals plant in China while downsizing its expansive headquarters in Ludwigshafen. A survey by the German Chamber of Commerce and Industry found that 32% of surveyed companies favored foreign investment over domestic expansion.

The German government has faced mounting pressure to address the country's economic challenges. Chancellor Olaf Scholz recently pledged to stimulate growth and streamline bureaucracy by accelerating digitalization for online government services and e-invoices, areas where Germany lags behind. Additionally, efforts are being made to facilitate the founding and growth of startups.

Germany's 16 federal states collectively advocated for a subsidized electricity price for energy-intensive industries, a proposal supported by Green Economy Minister Robert Habeck and leading business groups but opposed by Scholz and his liberal finance minister. These regional leaders called for EU states to be allowed to provide an electricity subsidy as a "bridge" until affordable renewable energy becomes more readily available.

Speaking in the Bundestag, Habeck acknowledged Germany's various challenges, including high energy costs, but cautioned against overly negative portrayals of Europe's largest economy, emphasizing that it was incorrect to claim that "everything is bad." Economist Carsten Brzeski highlighted the increased sense of urgency and urged waiting for more concrete policy actions, as stagnation in both industry and the broader economy appeared to be the new norm.

According to Destatis, the federal statistical agency, industrial production in July showed a year-on-year decline of 2.1%. Energy-intensive industries such as chemicals, metals, and glass experienced a more significant year-on-year drop of 11.4%. While German manufacturers are working through their order backlogs, these backlogs are gradually diminishing. New orders for German industry fell by 10.7% in July compared to the previous month, marking the largest decline since the initial pandemic lockdown in April 2020. Economist Franziska Palmas from Capital Economics anticipates further production declines in the remainder of the year, potentially pushing Germany back into a recession. Another factor impeding many German companies is a shortage of labor. A survey conducted by the Ifo Institute among 9,000 companies in Germany last month found that 43.1% reported a shortage of qualified workers, though this was a slight decrease from an all-time high of nearly half of all companies reporting shortages last year.