Germany’s industrial sluggishness worsens as output falls

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A sharp decline in car manufacturing has fueled a deeper slowdown in German industry, with production falling for the third consecutive month in July, intensifying pressure on the government to do more to pull the economy out of the doldrums .

The 0.8 percent month-on-month drop reported by Germany’s statistical office beat the 0.5 percent decline economists predicted in a Reuters poll. It would have been even larger had it not been for a rebound in energy production and construction in July. Production in the German auto sector fell 9 percent.

Europe’s largest economy has shrunk or stagnated over the past three quarters and its recovery from the coronavirus pandemic has been slower than that of the United States or the eurozone as a whole, with prices l energy, rising interest rates and a slowdown in trade with China – its second largest economy. export market – hitting Europe’s industrial heart particularly hard.

Ralph Solveen, an economist at German bank Commerzbank, said the continued decline in industrial production had affected “all manufacturing groups”, indicating it was likely to continue to “contribute to a contraction in the German economy in the second half of the year. “.

To add to the gloom, the EU’s statistics office cut its official estimate of euro zone growth in the second quarter from 0.3 percent to 0.1 percent. The move follows cuts to growth estimates for Italy, Ireland and Austria and means the eurozone lags even further behind the United States, whose gross domestic product rose by 0.6 percent in the quarter.

The euro fell 0.2 percent to $1.0707 against the US dollar on Thursday, bringing it closer to a three-month low.

There are growing fears that German industrial groups are relocating their production. BASF, the country’s chemical leader, has opted to build a new 10 billion euro petrochemical plant in China and is downsizing its sprawling headquarters on the banks of the Rhine in Ludwigshafen.

The German Chamber of Commerce and Industry recently found that 32 percent of companies surveyed favor foreign investment over domestic expansion.

“German industrial production continues to fall and even the most pure pessimists are starting to get scared,” said Carsten Brzeski, an economist at Dutch bank ING, who calculated that German industrial production was still 7% below its levels. before the pandemic.

The government has come under intense pressure to tackle the country’s economic woes. This week, Chancellor Olaf Scholz pledged to spur growth and banish ‘bureaucracy mold’ by accelerating the digitization of online government services and e-invoicing – areas where Germany lags behind – and by facilitating the creation and development of start-ups.

Scholz rejected the idea of ​​a subsidized electricity price for energy-intensive businesses or a sweeping stimulus package to spur growth. Last week, it unveiled its plan for a €7 billion tax relief package, which includes new rules on the write-off of investment costs in construction, digitalization and green energy.

“The positive news is that the sense of urgency has finally increased,” Brzeski said. “Let us now wait for more concrete political measures. Until then, stagnation in the industry and the economy in general seems to be the new normal.”

Destatis, the federal statistics agency, said the fall in industrial production in July was 2.1 percent year on year. The most energy-intensive industries, such as chemicals, metallurgy and glass, suffered a larger year-on-year decline of 11.4 percent.

German manufacturers are absorbing their order books, but these are shrinking. New orders in German manufacturing fell 10.7% in July from the previous month, the biggest drop since the first pandemic lockdown, which shuttered many factories in April 2020.

“Although the unfilled order book is still high, it is steadily declining and therefore unlikely to support production for long,” said Franziska Palmas, an economist at Capital Economics. “We expect a further drop in production over the rest of the year and a contribution to the recession in Germany.”

Another factor holding back many German companies is the labor shortage. A survey conducted last month by the Ifo Institute of 9,000 companies nationwide found that 43.1 percent of them reported a shortage of skilled workers, an increase from the previous month but a decrease from at a record high of almost half of all companies last year.