(Bloomberg) -- German industrial production dropped in July — highlighting the underlying troubles of Europe’s largest economy after it unexpectedly shrank last quarter.
Output decreased 2.4% from June, worse than predicted by a single analyst in a Bloomberg survey. Automotive was the main driver, though most sectors were down, the statistics office said.
Germany’s economy contracted by 0.1% in the second quarter — dashing hopes that it can finally leave behind years of stagnation. The fact that Volkswagen AG is considering unprecedented factory closures in its home market adds to the gloom.
On Thursday, the Ifo Institute lowered its forecasts for this year and next significantly. It now expects zero growth in 2024 instead of 0.4% before and only 0.9% in 2025, compared with 1.5% previously.
The Kiel Institute for the World Economy is even more pessimistic, saying this week that it sees gross domestic product shrinking 0.1% this year — following a 0.3% contraction in 2023.
“Today’s data is a cold shower for everyone hoping for a speedy recovery,” said Carsten Brzeski, head of macro at ING. “In fact, it suggests that the bottoming out of industry still has a long way to go. We’ve already got weak sentiment indicators, and the risk of yet another quarter of stagnation or even contraction has clearly increased.”
What Bloomberg Economics Says...
“We expect German GDP to nudge up a bit in the course of the second half of 2024, mainly due to the services sector gaining momentum from higher real incomes. There is an increasing risk, however, that activity in 2H24 won’t be strong enough to achieve a positive annual growth rate.”
—Martin Ademmer, economist. For full react, click here
Germany wasn’t the only country to suffer at the start of the third quarter. French industrial production numbers published Friday also showed a contraction of 0.5%, worse than the 0.3% expected by economists. A sharp reduction in production in the automotive sector was key here too.
Data earlier this week revealed an unexpected increase in German factory orders in July. Still, the advance was due to large-scale orders, without which the gauge would have slipped.
Meanwhile, trade data showed a boost in both exports and imports in July, matching the direction predicted by economists.
Bundesbank President Joachim Nagel said Tuesday that the contraction in spring must be a “wake-up call” and that “current company reports make it clear that certain sectors are under pressure.”
A recovery in the manufacturing sector is key to reviving Germany’s economy, but so far there are no signs of a real turnaround — adding to concerns that its troubles are more structural than temporary.
--With assistance from Kristian Siedenburg, Joel Rinneby, William Horobin and Mark Evans.
(Updates with economists starting in sixth paragraph.)
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