German GDP is once again on the brink of collapse following warnings from an industry that is struggling to get out of the rut

German GDP is once again on the brink of collapse following warnings from an industry that is struggling to get out of the rut
German GDP is once again on the brink of collapse following warnings from an industry that is struggling to get out of the rut

The historically all-powerful German industry is unable to get out of the quagmire. The paradigm shift brought about by the end of cheap Russian gas and China’s push for innovation in its production, as well as the sharp rises in interest rates over the past two years, continue to make it difficult for the ailing sector to find its way back. This seriously affects a stagnant economy that has barely managed to surpass its pre-pandemic levels. Although some optimism had been generated with a cyclical recovery in the second half of the year beyond the major structural challenges, the battery of industrial data for May released last week makes it quite difficult for the gross domestic product (GDP) to give any joy in the second quarter of the year. A reading that the German federal statistical body (Destatis) will publish on July 30 as preliminary data.

Last Thursday it was learned that the order book of the manufacturing industry The German economy fell in May, for the fifth consecutive month, by 1.6% compared to April, well above what economists had expected. In year-on-year terms, the fall was a revised 8.6%, according to data released by Destatis. On Friday, the blow came with the data of Industrial production. In seasonally adjusted terms, the industrial sector produced 2.5% less in May than in April, when a flat figure was expected. The drop leaves production down 0.4% so far this year and 11.5% below its pre-pandemic level. In year-on-year terms, industrial production is down almost 7%.

The decline in output was broad-based across all sectors, with particularly large declines in the automotive sector (-5.2% month-on-month) and machinery and equipment (-5.9%). Construction output also fell significantly (-3.3%) after being boosted by favourable weather effects earlier in the year. In contrast, energy-intensive industry rose slightly (+0.2%), providing some consolation, but remained well below its pre-Ukraine war peak.

“Overall, the May data confirm that German industry is still in decline and that Production may continue to decline in the coming months. Export order surveys have recovered somewhat recently, but still point to a contraction in industrial production. Domestic industrial orders, meanwhile, are close to a record low, suggesting that domestic demand remains weak. Meanwhile, falling house prices and still-high interest rates will continue to weigh on construction activity for some time to come,” explains Franziska Palmas, Senior European Economist at Capital Economics.

When interpreting the significant decline in production in May, it should be noted that production figures are always influenced by special effects, says Ralph Solveen, an economist at Commerzbank. For example, the May figure may have been negatively influenced by a calendar effect in May (Thursday holidays, for example, allow many employees to take a day off on Fridays). This may not have been fully taken into account in the statistical adjustment for calendar effects. It is therefore quite possible that a significant increase will be recorded in June again. However, Solveen warns, this should not change the fact that production fell in the second quarter. “This increases the likelihood that the decline in production will be negatively affected by a calendar effect in May.” The German economy, after a slight increase at the beginning of the year, has started to suffer again in the springas we have been waiting for a long time,” he warns.

Germany again recorded positive growth in the first quarter of 2024 (+0.2% quarter-on-quarter, as in France), slightly below the euro area (+0.3% quarter-on-quarter). However, this figure is evaluated differently if the GDP contraction of 0.5% observed in the fourth quarter of 2023. GDP in the first quarter of 2024 is therefore 0.3% lower than in the third quarter of 2023. GDP is even 0.1% below the level of activity in the first quarter of 2022 (i.e. before the war in Ukraine began), which highlights the fact that Germany is among the countries that have suffered the most from rising energy prices. This decline is largely due to industry, whose output remained, on average in the first quarter of 2024, almost 5% below the level observed in February 2022.

“Looking ahead to the second half of the year, increases the risk that the overall expected recovery will take longer “The economic recovery is still a long way off. After all, business sentiment has deteriorated again recently and order intake in the industrial sector is still pointing downwards after the fall recorded yesterday in May. In addition, the significant decline in construction output in May is a reminder that the downward correction is by no means over. We continue to assume that there will be a recovery in the second half of the year, but our assessment that it will be very modest is confirmed,” adds the Commerzbank economist.

“In the first few months of the year, optimism had returned to the German economy. Growth in the first quarter and improved confidence indicators, as well as a large dose of hope, had given rise to this new optimism. At the beginning of the second half of the year, optimism has given way to greater realism. The German economy is losing steam again,” says Carsten Brzeski from ING’s research department.

Like his colleagues, Brzeski admits that the industrial figures for May increase the German economy likely to fall back into negative territory in Q2: “There are still a number of cyclical factors that could weigh on economic activity. Higher oil prices as a result of the Middle East conflicts could again weigh on industry and exports. In addition, rising bankruptcies and announcements of job restructuring by some companies not only fuel the risk of a weakening labour market this year, but also argue against a strong industrial recovery. Finally, in addition to possible cyclical headwinds, Germany’s well-known structural weaknesses will not disappear overnight and will limit the pace of any recovery.”

This same Monday, the May trade data The data have proved the ING analyst’s caution right. The trade surplus increased, but not by the right amount: exports fell by 3.6% in the month and imports by 6.6%. The data show that exports to China fell by 10.2% in the month. Foreign trade with EU countries was also relatively poor: exports fell by 2.5% and imports by 8.9% respectively.

In the case of the figures with China, the change in the commercial paradigm is evident, which threatens to aggravate the structural challenges of a Germany that has lived off exports for decades. “Global demand is already mediocre. China is exporting to get out of an economic crisis and Cheap Chinese products are partly displacing more expensive products made in Germanydespite recent tariff increases on Chinese electric vehicles in the US and EU,” BCA Research strategists note in a note to clients.

Weak political momentum

Until Friday, another shadow loomed on the horizon: the disagreement between the parties of the weak governing coalition to draw up the 2025 budget. The alliance between social democrats, greens and liberals continues to falter amid internal disagreements and the shock of the ballot boxes (regional and European elections) and polls. The possibility that they would not reach a budget agreement would have increased uncertainty and affected growth.

After lengthy negotiations, Chancellor Scholz (Social Democrat), Economics Minister Habeck (Greens) and Finance Minister Lindner (FDP) reached an agreement on Friday. Agreement in principle on the federal budget for 2025 and a “growth package”The agreement consists of three parts: a supplementary budget for 2024, the key points of the federal budget for 2025 and measures to boost the German economy.

The supplementary budget for the current year will allow the federal government to borrow an additional €11.3 billion. This is probably due primarily to the weak economy and thus lower tax revenues, as well as increased expenditure, particularly on social benefits (Bürgergeld or citizens’ benefit). Added to this is increased expenditure from the Climate and Transformation Fund (KTF), which is intended in particular for price guarantees for renewable energy producers. According to the Finance Minister, this increased borrowing is also compatible with the debt brake due to the weakening economy. On the other hand, the federal budget for 2025 is expected to include expenditure of €481 billion, which would represent a decrease of €8 billion compared to 2024 (if the supplementary budget is already taken into account). Of these, 57 billion euros will be allocated to investments, which would be almost 10% more than the previous year.

The planned package of growth measures has as its main objective Strengthening work incentives. This applies to older people who want to work beyond the legal retirement age. In future, they will receive, in addition to their salary, employer contributions to unemployment insurance and pensions. The other target group is recipients of the citizen’s income. Additional financial incentives to work are planned for them. At the same time, their obligation to cooperate in finding work will be strengthened. The second major block of this package will focus on the reduction of bureaucracyAmong other things, there will be far fewer companies subject to supply chain regulations in the future.

However, despite this slight political boost, the cloud of pessimism has not lifted. “Germany is facing a fiscal austerity. It is constitutionally required to maintain a balanced budget. However, the pandemic emergency funds disbursed in 2020 are now forcing the government to cut spending. The net result is that the economic tailwind generated by the pandemic-era stimulus is turning into a headwind,” BCA Research analysts make clear.

These same strategists warn that the easing of financing conditions will not be as generous as the German economy requires right now: “Although the ECB cut rates for the first time in this cycle in June, monetary policy remains restrictive and will continue to weigh on demand. The ECB is unlikely to cut rates as aggressively as it raised them“.

In an almost premonitory manner, Brzeski traced again parallels once again with football on Friday just before Spain eliminated hosts Germany in the quarter-finals of the European Championship: “After an encouraging start to the year, the German economy has failed to meet high expectations and is losing steam again long before it has reached full speed.”




 
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