German industry hit by biggest downturn since 2009

Germany’s sprawling industrial sector is suffering its steepest downturn for a decade, underlining how the engine of the eurozone’s biggest economy is sputtering.

Industrial output, which includes Germany's dominant factory sector, dropped 5.3 per cent in October from the same month in 2018, according to the Federal Statistics Office. The figures suggest that the German industrial slowdown is likely to weigh on overall eurozone growth in the fourth quarter.

Combined with data published this week showing industrial orders fell sharply in October, and with most manufacturers expecting a further shrinkage in November, the figures suggest that the two-year downturn in German manufacturing is nowhere near close to ending.

"Far from bottoming out, Germany's industrial recession may be getting worse," said Andrew Kenningham at Capital Economics. "The latest data support our view that a recession is still more likely than not in the coming quarters."

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Germany’s export-focused economy has been hit by the US-China trade war, uncertainty over Brexit and a sharp decline in car industry output, which has been disrupted by new emissions rules and the shift to electric vehicles.

The 1.7 per cent monthly drop in German manufacturing in October was concentrated in production of capital goods, including tools, buildings, vehicles, machinery and equipment, which fell 4.4 per cent. Production of intermediate goods and consumer goods both increased.

Eye of the storm

The German car industry, which directly employs 830,000 people and supports a further 2 million jobs in the wider economy, is in the eye of the storm. Vehicle production in the country slumped 5.6 per cent from September to October, taking the year-on-year decline to 14.4 per cent.

In recent weeks German automotive giants, from Daimler and Audi to suppliers including Continental and Bosch, have announced that about 50,000 jobs will be lost or are at risk, as their traditional businesses become less profitable.

"Looking ahead, both soft and hard indicators bode ill for industrial activity in the months ahead," said Carsten Brzeski, economist at ING. "Production expectations show very tentative signs of stabilisation at low levels but order books are still shrinking and inventories remain high."

The German economy grew by 0.1 per cent in the three months to September, narrowly avoiding a recession as higher household and government spending and a rebound in exports helped to offset a decline in industrial production.

But there are fears that the crisis in the manufacturing sector will spill over into the services industry and hit both Germany's labour market and consumer confidence. Pressure is increasing on the government in Berlin to ditch its commitment to a balanced budget and to spend more money.

Investment call

The new leaders of Germany's Social Democratic party this week called for a "massive" investment programme and a higher minimum wage of €12 an hour ahead of talks with Chancellor Angela Merkel's Christian Democrats over the policies of their grand coalition government.

Recent data suggested that consumers pulled back in October, with eurozone retail sales falling by 0.6 per cent. Germany experienced the sharpest decline of minus 1.9 per cent - along with Ireland - figures published this week showed.

The extension of the industrial production decline into the fourth quarter dashes economists’ hopes that the eurozone’s traditional manufacturing powerhouse could be recovering after manufacturing orders rebounded in September.

"A turnround in manufacturing and thus of the German economy as a whole is thus not yet in sight," said Ralph Solveen, economist at Commerzbank. "While there is some hope in the stabilisation of sentiment indicators which is currently taking shape, hard data remain weak so far."

Hopes of a recovery had also been fuelled by two consecutive months of improved survey data for the German industrial sector in both October and November. However, survey indicators remain “exceptionally low”, according to Mr Kenningham, who said they pointed to a year-on-year decline of 5 per cent in German manufacturing output for November. – nCopyright The Financial Times Limited 2019