Haver Analytics
Haver Analytics
| Feb 07 2024

German Manufacturing Remains Weak and Is Getting Weaker

German industrial output fell in December by 1.6%, extending the episode of continuous month-to-month declines to the last four months and making it part of a period of an eight-month stretch in which there were six month-to-month declines interrupted by two months when output was stagnant. This has been very difficult stretch for German industrial output. The country depends on its industrial sector for economic leadership and growth. Germany has been a significant exporting country. The war in Ukraine has severely disrupted the functioning of the German economy partly because Germany was also doing a good deal of business with Russia before the war began.

Industrial output trends German industrial output is falling sequentially, at a 3.1% annualized drop over 12 months, a 7.7% annualized drop over six months, and a 7.8% annualized drop over three months. Consumer goods and capital goods sectors show declines over each of these three horizons, but they don't show declines that are becoming sequentially worse. And both consumer and capital goods sectors show smaller annual rates of decline over three months than over 12 months. However, intermediate goods reveal a great deal of weakness as output falls by 4.6% over 12 months; that drop steps up to a pace of minus 15.9% over six months then the drop accelerates sharply over three months logging a minus 22.7% annual rate of decline.

Construction The construction sector has also been logging steady declines in output construction shows sequential and worsening declines in output, falling 1.4% over 12 months but dropping at a 25.5% annual rate over three months.

Other economic measures Manufacturing output shows worsening sequential declines, dropping by 3.9% over 12 months and contracting a 9.4% annual rate over three months. Real sales and manufacturing decline in all three horizons and the drop over three months at a 4.7% annual rate is greater than the pace of drop over 12 months which is kind of -3.4% pace; however, the decline in output in Germany is at a slightly slower pace over three months and over six months. Chair wheel manufacturing orders break this pattern of weakness showing a 2.1% increase over 12 months and a 20.4% annual rate of increase over three months, but this was propped up by some unusual aircraft orders the increase reflects a one- off event that isn't likely to be repeated.

Surveys of industrial activity or expected activity Surveys of the German economy from ZEW, the IFO, and the EU Commission show weakening trends. The EU Commission and the ZEW indexes are diffusion indexes that show negative values over all three horizons and values that are gradually worsening. The IFO constructs indexes and these show manufacturing weakening from 12-months to three-months as well as expectations that are weaker over three months than over 12 months, but they managed to improve slightly from what they averaged over six months.

IP snapshot from Other Europe Industrial production elsewhere in Europe is more mixed in December. French and Norwegian output rise while Spanish and Portuguese output falls. Sequentially French output is accelerating along with Portuguese output. Spanish output is decelerating, transitioning from a growth rate of -5.3% over 12 months to -20% at an annual rate over three months Norway fails to show a clear trend, but over three months output is up by 2.7% at an annual rate, better than its 0.9% gain over 12 months.

Quarter-to-date (completed Q4) In the quarter-to-date, all the German industrial production measures show industrial declines. Real manufacturing orders show a minor increase of 0.4% at an annual rate. Three out of four surveys weakened over the quarter, with the IFO manufacturing expectations the exception, which improves slightly. Quarter-to-date output changes for other European reporters show a decline from Spain, against a small 0.2% increase in France, a small 0.8% increase in Norway, and a substantial 12.9% annual rate increase from Portugal.

Historic assessments of performance The column on queue standings compares the various industrial measures to their appropriate measure of performance evaluated in the context of the last 24 years. Industrial production ranks in the lower 14.2% of its queue of growth rates over this period. The strongest industrial sector is capital goods and that has a 23.8 percentile standing, in the lower quartile of its historic queue of growth rates. Economic signals are weak for construction, for manufacturing, and for real sales; real manufacturing orders that have the distortion of one-time aircraft orders have a very strong 95.5 percentile standing. The various industrial surveys have standings that range from a low 5.2 percentile standing for manufacturing by the IFO, to a high 18.1 percentile standing for the EU Commission survey - all of these are quite weak standings. The growth rates of IP for the other four European countries show France above its median with a 55.1 percentile rank; Norway is close to its median of 50 with a 45.9 percentile rank. Spain and Portugal sport rankings in their 14.8- and 21.5-percentile, respectively.

Summing up There's clearly a lot of weakness in Germany and in Europe. This report shows that the weakness is continuing and in several respects deepening. The war drags on between Russia and Ukraine. The bright spot is news that doesn't appear in this table - that is that inflation in the European Monetary Union, like in the U.S., has fallen sharply and in Europe the policy debate - like in the U.S. - is divided over whether policy should keep rates at current levels for a while to make sure they grind the inflation rate lower or whether the central bank should be empowered to cut rates soon. The drop in European inflation creates the opportunity for the central bank to change behavior and to brighten the outlook for growth more considerably than current trends allow.

  • Robert A. Brusca is Chief Economist of Fact and Opinion Economics, a consulting firm he founded in Manhattan. He has been an economist on Wall Street for over 25 years. He has visited central banking and large institutional clients in over 30 countries in his career as an economist. Mr. Brusca was a Divisional Research Chief at the Federal Reserve Bank of NY (Chief of the International Financial markets Division), a Fed Watcher at Irving Trust and Chief Economist at Nikko Securities International. He is widely quoted and appears in various media.   Mr. Brusca holds an MA and Ph.D. in economics from Michigan State University and a BA in Economics from the University of Michigan. His research pursues his strong interests in non aligned policy economics as well as international economics. FAO Economics’ research targets investors to assist them in making better investment decisions in stocks, bonds and in a variety of international assets. The company does not manage money and has no conflicts in giving economic advice.

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