analysis
German industry is warning of a further decline in production this year. But the engine of the German economy may be running better than expected.
German industry is pessimistic about the current year and expects production to decline again. “Germany is expected to fall further behind in 2024,” said the President of the Federation of German Industries (BDI), Siegfried Russwurm, today at the start of the Hanover Trade Fair. “We expect industrial production to decline by 1.5 percent compared to the previous year.”
German industry in a downward trend
It would be the third decline in a row: in 2022, production in the manufacturing sector fell by 0.2 percent, and in 2023 the decline was 1.2 percent. This means that production was around nine percent below the record level of 2018; The downward trend that began six years ago is still intact.
But a closer look at the data paints a somewhat more positive picture. Despite the negative BDI forecast, there are a few glimmers of hope – so is German industry ultimately not as bad as the sole focus on industrial production suggests?
Glimmer of hope from the chemical industry
Incoming orders from German industry – which are admittedly very susceptible to fluctuations – rose slightly by 0.2 percent in February compared to January. What is particularly exciting is the look at the chemical industry: “A certain sign of hope is the somewhat stronger demand for products from the chemical industry, as this usually runs ahead of the general economy,” notes Commerzbank economist Ralph Solveen.
The ifo business expectations for the chemical industry also point in this direction: the indicator rose from -14.9 points in February to -2.9 points in March. “The order situation in the chemical industry still leaves a lot to be desired, but the low point of the crisis appears to have been overcome,” says ifo industry expert Anna Wolf.
Relief through falling energy prices
In fact, production in the energy-intensive sectors – the chemical industry requires by far the most energy of all industries – increased in February for the second month in a row. This ended its downward trend that had lasted more than two years.
According to the unanimous opinion of experts, the reason for this is the significantly lower energy prices. Since the chemical industry also produces important intermediate goods, it is likely to be the first to notice a change for the better. Overall, the manufacturing sector produced 2.1 percent more in February than in January – the second significant increase in a row.
Value creation in industry is falling less sharply
A look at the gross value added in industry also shows that German industry may be doing better than expected. This key figure is calculated by deducting advance payments from industrial production, so that only the added value actually created in the production process is determined.
Martin Moryson, chief economist for Europe at the asset manager DWS, therefore considers value added to be the more suitable indicator for assessing the status quo of German industry: “Gross value added and not production determines the added value of the economic activity of individual companies and thus of the German economy as a whole. ” If one takes gross value added as a measure, Germany is still a long way from deindustrialization.
Value creation actually paints a much more relaxed picture of the situation in German industry: it has fallen since its peak at the beginning of 2018, but only by around five percent by the end of the fourth quarter of 2023. For comparison: industrial production rose by a significant 13 percent in the same period percent in depth.
Will the ECB interest rate change initiate the industry turnaround?
The key question for the industry now is when the European Central Bank (ECB) will initiate the interest rate turnaround – and when the interest rate cuts will begin to take effect. Economists and market experts are currently expecting the first interest rate cut by the monetary authorities led by ECB boss Christine Lagarde in June.
The experts at Deutsche Bank are skeptical that this will have a positive impact in the manufacturing sector in the short term. Rather, analyst Eric Heymann expects that the negative effects of last year’s interest rate increases will still be noticeable in 2024. Deutsche Bank therefore expects a production decline of 2.5 percent for the current year and is therefore significantly more pessimistic than the BDI.
Hoping for the second half of the year
Commerzbank expert Solveen, however, assumes that production will at least stabilize in the second half of the year. “The slowing effect of the global interest rate increases over the past two years is likely to gradually diminish, which should also benefit industry.”
In addition, a statistical base effect could also have a positive impact from the second half of the year, as the decline in industrial production in the third and fourth quarters of 2023 was already very significant at 2.0 and 2.2 percent respectively.
Last but not least, the global recovery in industrial activity is encouraging. In February, the purchasing managers’ index for global industry rose above the 50 point mark for the first time since August 2022, and then rose further to 50.6 points in March. Values of over 50 indicate increasing industrial production worldwide – and this is unlikely to leave German industry unscathed.