A sharper than expected fall in German industrial production has prompted economists to warn that Europe’s largest economy is likely to slide into a recession after factory orders, retail sales and exports also suffered significant declines.
The German economy withstood the energy crisis sparked by Russia’s full-scale invasion of Ukraine without the steep downturn feared by many analysts. But recent data suggests business and consumer activity is being hit by high inflation, rising borrowing costs and slowing trade.
German industrial production fell 3.4 per cent in March compared with the previous month, the biggest drop for 12 months, according to the federal statistical office.
Economists had forecast in a Reuters poll that German industrial production would fall only 1 per cent. “These are overall grim numbers,” said Claus Vistesen, an economist at research group Pantheon Macroeconomics.
Vistesen said that despite March’s decline, first-quarter industrial production was still up 2.4 per cent on the previous quarter. But he added: “Unfortunately, the slide in output at the end of the first quarter now leaves a very weak carry-over for the second quarter.”
Carsten Brzeski, an economist at Dutch bank ING, said lower German industrial output “increased chances of a downward revision of first-quarter GDP growth”. He added: “Any downward revision would actually mean that the economy had still fallen into recession after all.”
The flash forecast of first-quarter gross domestic product in Germany released on April 23 indicated that it had stagnated from the previous quarter — an improvement from the 0.4 per cent contraction in the final quarter of last year. Revised first-quarter data is due on May 25 and a second consecutive quarterly decline in GDP would meet the definition of a technical recession.
The drop in German industrial output reflected declines in most sectors. The biggest fall was a 6.5 per cent drop in production among carmakers. But output also fell 3.4 per cent at machinery and equipment manufacturers and 4.6 per cent in construction.
German industrial output remains below pre-pandemic levels and the gloom among the country’s manufacturers deepened after a 10.7 per cent drop in factory orders in March, which was the biggest monthly decline since pandemic lockdowns hit in April 2020.
The German consumer is in retreat after retail sales in the country dropped 2.4 per cent in March, the biggest monthly decline of any eurozone country. German exports also sagged in March, falling 5.2 per cent from the previous month, hit by particularly strong declines in shipments to the US and China.
The unexpectedly weak data came only days after the German economics minister Robert Habeck raised the official growth forecast for this year from 0.2 per cent to 0.4 per cent, saying energy subsidies had helped to avoid a recession.
But economists expect an unprecedented rise in interest rates, combined with persistently high levels of inflation to weigh on consumer and business activity in Europe’s industrial heartland for much of this year.
“We therefore expect industrial production to continue to decline in the coming months and contribute to the fact that the German economy will not recover in the second half of the year, but rather that a mild recession is to be feared,” said Ralph Solveen, an economist at German lender Commerzbank.
Source: Economy - ft.com
