German industrial output fall exacerbates fears of recession

German industrial output fall exacerbates fears of recession

Industrial production in Germany dropped by a larger-than-expected 1.5 per cent month on month in June, compounding fears that Europe’s largest economy could be heading for its first recession in more than six years.

Analysts polled by Reuters had estimated output would fall 0.4 per cent during the month compared with May. The fall meant that industrial production was 5.2 per cent lower than a year ago, Germany’s statistics office said.

Carsten Brzeski, ING’s chief economist for Germany, characterised the figures as “devastating, with no silver lining”.

After a brief slowdown last year, the German economy rebounded in the first three months of 2019. But many economists, including those at the Bundesbank, Germany’s central bank, are predicting that next week’s GDP figures will show that the economy shrank again in the three months to June.

Mr Brzeski said: “We should prepare for contraction in the German economy in the second quarter, unless exports bring an unexpected surprise on Friday.”

A crisis in the carmaking industry and an intensifying trade war between the US and China have turned Germany from the powerhouse of the eurozone economy to one of its weakest performing members.

The manufacturing sector, historically the engine of German growth, has become its main weakness as the car industry continues to grapple with the shift away from diesel cars to new electric models and exporters face a slowdown in orders from China.

The slowdown in industrial production came across the board, including intermediate goods, capital goods, energy and consumer goods. The only area that grew was construction, but only by a meagre 0.3 per cent after two months of decline.

“The crisis in the automotive sector is continuing unabated,” said Ralph Solveen, deputy head of economic research at Commerzbank. “The main reason for this weakness is now likely to be significantly weaker foreign demand. This all points to the fact that manufacturing will remain the weak spot of the German economy.”

Wednesday’s figures came a day after factory orders rose unexpectedly, driven by an increase in demand from countries outside the eurozone. While those figures may have offered a glimmer of hope for Europe’s economic powerhouse, analysts pointed out that they were buoyed by a few exceptionally large orders and new orders have dropped by an average of 0.7 per cent every month this year.

June’s industrial production decline “kills off any hopes that the strong orders data published yesterday marked the beginning of a recovery,” said Andrew Kenningham, chief Europe economist at Capital Economics. “Business surveys uniformly point to a further contraction in July, so things look set to get worse rather than better.”

The Ifo institute, a German think-tank, added to the gloom saying on Wednesday that its latest business survey for last month found sentiment had deteriorated markedly from minus 2.1 in June to minus 5.7 in July — its lowest level for almost seven years — indicating that pessimists far outweigh optimists in German industry. “More and more companies are announcing that they intend to cut back their production in the coming quarter,” said Robert Lehmann, an Ifo economic analyst.

Other data published this week included a downward revision in services figures that showed the sector grew at a slower rate in July than previously thought, fuelling economists’ fears that the downturn in Germany’s export-focused manufacturing industry is spreading to its domestic-focused services sector.

“The continued plunge in production is scary,” said Alexander Krueger, economist at Bankhaus Lampe. “The longer this continues, the more likely it is that other sectors of the economy will be dragged into this.”

The German government expects the country’s economy to grow by 0.5 per cent this year and to rebound with growth of 1.5 per cent next year.

Germany’s 10-year bond yield fell to a new record low of minus 0.56 per cent on Wednesday as investors reacted to the weak industrial production data.

Commerzbank, Germany’s second-largest bank, cited the economic slowdown as the main reason for boosting its provisions for loan losses and warned that its profit target for this year was “significantly more ambitious” because of the “worsening” conditions.

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