Could Germany fall back in recession on sputtering car industry?

Germany’s industrial production tumbled in June, in large part due to a drop in automotive output. Germany’s industrial production tumbled in June, in large part due to a drop in automotive output.

The epidemic and the clogged supply chains have taken a toll on the German auto industry, which makes up around 5% of the country’s GDP.

The German Automotive Industry Association estimates that in the first half of the year, 2.2 million vehicles were produced. Production is still 10% lower than in the first half of 2019, even though it was a big improvement compared to the same period in 2022. It can take some time before output reaches the pre-pandemic level.

Industrial production in Europe’s biggest economy fell 1.5% in June compared with May, driven by a 3.5% drop in Germany’s vast automotive sector. The decline in German industrial output, much steeper than forecast by economists, raises the risk that the manufacturing heavyweight will contract again later this year, potentially falling back into recession.

The construction sector, where output shrank by 2.8%, also had a negative impact on overall industrial production, the country’s statistics office said Monday.

Germany only just emerged from a recession in the April-to-June period as gross domestic product (GDP) was flat compared with the previous quarter, but the latest provisional data suggests the slight improvement in the economy’s fortunes may not last.

A drop in industrial output is expected to be one of the factors causing a renewed contraction in German GDP in the second half of this year. Also a fall in GDP is predicted later this year.

In view of the overall economic situation and the development of incoming orders, it can be expected that the high [production] growth rates will soon slow down.

The high order backlog is slowly being reduced. In other parts of Germany’s industrial sector, which includes energy production, prospects appear brighter. New orders in manufacturing jumped 7% in June from the previous month, provisional data showed Friday, although the figures were distorted by large-scale orders.

German industry remains amidst rough waters and last year’s energy price shock and weakness in US and Chinese demand are among other factors. Volkswagen, Europe’s largest carmaker, has been grappling with sluggish sales in China, its single biggest market, losing out to local competitors.

The company reported a 14.5% drop in its deliveries in China in the first quarter. It saw a recovery in April and May but deliveries in the first half overall were still 1.2% down on the same period in 2022.

Germany’s broader industrial sector has had to contend with high energy prices, which were already rising in Europe when Russia invaded Ukraine in February 2022, sending them to record highs. European natural gas prices have since tumbled to stand 44% below their pre-war level.