Industrial production in Germany, the largest economy in Europe, experienced a significant decline of 1.5% in June compared to May. This decline was primarily driven by a substantial 3.5% drop in Germany's expansive automotive sector, CNN reports.
This unexpected and sharp decrease in German industrial output raises concerns about the potential for the manufacturing heavyweight to face further contraction later this year, which could potentially lead to a recession.
Contributing factors
Notably, the construction sector also contributed to the overall decline in industrial production, with a contraction of 2.8%, as reported by the country's statistics office on Monday. Germany recently emerged from a recession in the April-to-June period, during which its gross domestic product (GDP) remained flat in comparison to the previous quarter. However, the latest provisional data implies that this slight economic improvement might not be sustained.
Economists predict that the drop in industrial output could be a contributing factor to a renewed contraction in Germany's GDP in the latter part of this year. The Chief Economist at Commerzbank, Jörg Krämer, also anticipates a decline in GDP in the coming months. The German automotive industry, which accounts for around 5% of the economy, is grappling with the aftermath of the pandemic and supply chain disruptions.
Car production or other sources?
While car production experienced a notable increase in the first half of the year compared to 2022, it still remains 10% lower than the levels observed in the first half of 2019. Achieving a return to pre-pandemic production levels might take some time, according to Hildegard Müller, the president of the German Automotive Industry Association.
However, other segments of Germany's industrial sector, such as energy production, show more promising prospects. Manufacturing, for instance, witnessed a 7% surge in new orders in June compared to the previous month, though these figures were affected by significant orders. Despite this, challenges persist for the German industry, including the impact of the energy price shock from the previous year, along with weaker demand from the US and China.
Volkswagen, Europe's largest carmaker, has been facing sluggish sales in its significant Chinese market, losing ground to local competitors. Although there was some recovery in April and May, the company's overall deliveries for the first half of the year remained 1.2% lower than the same period in 2022.
Germany's broader industrial sector is also dealing with high energy prices, which soared when Russia invaded Ukraine in February 2022, causing them to reach record levels. However, European natural gas prices have since fallen significantly, standing at 44% below their pre-war levels.
Considering these circumstances, economists at Berenberg predict that Germany might experience a "mild recession" in the latter part of this year.
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