Germany Risks Falling Back into Recession as Car Industry Sputters

Europe’s largest economy, Germany, experienced a significant decline in industrial production in June, with a sharp 1.5% drop compared to the previous month. The slump was primarily driven by a staggering 3.5% decrease in the country’s massive automotive sector, a figure that surpassed economists’ forecasts.

The unexpected decline in industrial output has raised concerns about the possibility of Germany slipping back into recession later this year.

In addition to the automotive sector, the construction industry also suffered a setback, with output shrinking by 2.8%, contributing to the overall decline in industrial production, as reported by the country’s statistics office on Monday.

Germany recently emerged from a recession in the April-to-June period, with the gross domestic product (GDP) remaining flat compared to the previous quarter. However, the latest provisional data suggests that the slight improvement in the economy’s fortunes may not be sustainable.

Economists at Capital Economics and Commerzbank have expressed their concerns, predicting a potential drop in GDP later this year due to the negative impact of falling industrial output. The situation has been exacerbated by challenges faced by the German car industry, which makes up about 5% of the economy. The automotive sector has been grappling with the aftermath of the pandemic and disruptions in supply chains.

While there has been an increase in car production compared to last year, with approximately 2.2 million cars manufactured in the first half of 2023, it still falls 10% short of the pre-pandemic level witnessed in the first half of 2019. The slow recovery and ongoing challenges in the automotive sector may continue to weigh on Germany’s economic performance.

Although there are some positive signs in other parts of Germany’s industrial sector, such as energy production, with new orders in manufacturing rising by 7% in June from the previous month, the overall outlook remains uncertain. Salomon Fiedler, an economist at Berenberg, highlighted the rough waters that the German industry is currently navigating, citing last year’s energy price shock and weakness in demand from the US and China, among other factors.

The combination of sluggish automotive sales, high energy prices, and uncertainties in international demand has left Germany’s industrial sector facing significant headwinds. As a result, experts at Berenberg anticipate the country falling back into “a mild recession” in the second half of this year.