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In recession, Germany sees its industrial production continue to weaken in June

Article updated at 12:55 p.m.

Industrial production in Germany plunged in June, for the second consecutive month, against a backdrop of high energy costs and sluggish demand for the sector, which have plagued Europe’s biggest economy for several months. In detail, it fell by 1.5% over one month in data adjusted for seasonal variations and working days, after a revised drop of 0.1% in May, the statistical office Destatis said on Monday August 7. in a press release.

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The decline is much stronger than expected by experts from the financial analysis tool Factset, who expected a drop of 0.5%. Over one year, production fell by 1.7%, again according to Destatis. In detail, the production of capital goods fell by 3.9%. A drop which is not offset by the increase in demand for consumer goods (+1.8%) and intermediate goods (+0.4%), according to Destatis. The automobile sector saw its production fall by 3.5% over one month.

Energy prices remain high

German industry, the pillar of Europe’s leading economy, has been suffering for several months. It is weighed down by a sharp fall in domestic demand, due to inflation, and by rate hikes led by the European Central Bank (ECB). Energy prices also remain relatively high for the industry. Moreover, some of the most energy-intensive activities, such as chemicals, are struggling to regain their pre-war production level in Ukraine.

« The energy crisis has probably caused a permanent loss of capacity in these sectors “, explains Franziska Palmas, expert for Capital Economist.

Exports, essential for the sector, are less dynamic, against a backdrop of slowing demand for German products in China and the United States, two crucial markets for the sector.

The publication of these figures comes as orders placed with German industry rose sharply in June for the second month in a row, with large contracts, particularly in aeronautics. This key indicator for the manufacturing sector, pillar of the German economy, rose by 7% over one month, after 6.2% in May, according to figures published Friday, August 4 by the national statistics institute.

Rising orders in industry

The indicator again exceeded its pre-March level, when it suffered a 10.9% pullback, the biggest monthly decline since the peak of the Covid-19 pandemic in April 2020. This rebound restores a a glimmer of hope for German industry, weakened by the energy crisis, inflation, and the rise in interest rates which have caused a drop in demand.

« Another surprise. We could start the second half in a more serene way if the other indicators were not so weak “, tempered Jens Oliver Niklash, analyst for LBBW.

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This increase has moreover was on the whole enabled by several large orders “commented the Ministry of the Economy. Without these, the indicator would have down 2.6% “. It is particularly ” an order in the field of aeronautics ” from ” from a euro area country “, which stimulated the indicator, said Destatis in its press release, without specifying what order it is. The machine tools sector also carried the indicator, with an increase of 5.1% over one month. For the automobile, on the other hand, the fall continues, with a 7.3% drop in orders. And orders in Germany fell by 2%, illustrating the still sluggish economy in the country.

Sluggish growth

Europe’s biggest economy entered recession in the first quarter, with two consecutive quarters of decline in GDP (gross domestic product), including a 0.4% drop between January and March. For the second quarter, Destatis reported a stagnant GDP (+0.0%), but these provisional figures may still change. Consumption expenditure of private households stabilized in the second quarter of 2023 after the weak winter semester “, had detailed Destatis at the end of July. This is due to a job market that remains solid, wages that have risen sharply and a downward trend in inflation.

Germany falls into recession

According to previous indicators, industry and construction, on the other hand, were unable to increase their production compared to the previous quarter, although supply difficulties were reduced and they benefited from a large order book. Rising financing costs dampened domestic demand, and the industry was further slowed by lower foreign demand.

Lower forecasts for the year 2023?

If German GDP has more or less left behind the technical recession – i.e. two quarters in a row in decline – it went through this winter, this could only be a parenthesis: the purchasing managers’ index (PMI) for July , in decline, pointed to a further decline in GDP during the current quarter, unless the months of August and September show a clear reversal in trend.

“Given weak sentiment amid destocking and shrinking order books, ECB rate hikes continuing to ripple through the economy, and central banks in other countries expecting continued interest rates at elevated levels in the coming months, we believe the demand outlook is subdued. The situation could nonetheless turn around towards the end of the year, when the fall in inflation and a certain inertia in the growth of nominal wages will have combined to allow a notable catch-up in real wages of households while the inventory cycle will probably have reversed”comments for his part Mateusz Urban, Economist, at Oxford Economics.

The German economy could also end the year in the red overall, at the back of the pack of euro zone countries. The main economic institutes are now expecting a decline estimated between 0.2 and 0.4%, the IMF for its part expecting -0.3%. Olaf Scholz’s government still sees GDP growth posting 0.4%, but this April forecast has a positive chance of being lowered in the fall.

The German situation stands out compared to its European neighbours. Growth in France reached 0.5% in the second quarter, much more than expected, driven by exports which compensated for household consumption at half mast, INSEE announced on Friday. In Spain, growth slowed slightly in the second quarter while remaining robust (+0.4%), thanks to strong household consumption, according to the National Institute of Statistics (INE).

(With AFP)