The endless ordeal of German industry: “It is bottoming out at best”

The ordeal that the German industry is going through is like one of those nightmares in which you run and run, but no progress. The difficult situation of the sector is being more than just a stain on its glorious history and each incoming data does not bring an improvement that inspires some optimism. This is what happened this Wednesday with the data on new factory orders for the month of November.

The Industrial orders fell 5.4% month-on-month in Novembercompared to -1.5% month-on-month in October. In year-on-year terms, orders decreased by around 2%. It is true, analysts acknowledge, that a large part of the decline in November is due to the weakness of large orders. And these these large orders, explains Vincent Stamer, economist at the German bank Commerzbank, although they also create added value in the German economy, of course, they are only processed with a time lag.

In fact, if these large orders are excluded, order intake has at least stabilized and increased by 0.2%. This meager percentage once again brings the temptation to say that the sector has already hit rock bottom and will experience an improvement, but that is not enough for experts. “There is still no sign of a recovery in the situation of the German manufacturing industry,” Stamer freely admits.

“Despite a timid recovery over the summer, the industry’s order book continued to weaken in 2024, with an average drop of 1% month-on-month since January. These weak order books, combined with still high inventories, do not bode well good for industrial production in the coming months, although bulk orders have blurred the figures in recent months,” agrees Carsten Brzeski, chief economist at ING and regular ‘doctor’ of the faltering German economy. “Still there is no change in trend in sight in German industry. At best, it is bottoming out,” he adds.

It is no longer just about end of ‘cheap’ gas from Russia for the war in Ukraine and aggressive rate hike of interest. Apart from the fact that high energy costs threaten to become chronic and become a structural problem, the model of high added value exports shows cracks in a world focused on services in which China is no longer the exceptional importer that Berlin had at the same time that it began to pose fierce competition (just take a look at the automotive sector, until now the crown jewel of German industry).

From Commerzbank, Stamer expands the panorama of pessimism: “In view of the fall in orders in the manufacturing sector, industrial production is also expected to be weak in the coming months. This is also supported by the fact that companies of the manufacturing sector describe their business situation as very weak in a survey by the ifo Institute and that their business expectations have apparently fallen even further. the lower interest rates is not yet having any revitalizing effect. “We therefore expect the German economy to stagnate at best during the winter semester.”

Another piece of information known this Wednesday supports the story. The disappointing retail sales suggest that the rebound in private consumption in the third quarter is unlikely to continue in the fourth. “Unless Christmas shopping brings a positive surprise, private consumption is doomed to decline, and the current political and regulatory uncertainty, together with the revival of inflation, make a substantial rebound in consumption unlikely,” warns Brzeski, who confirms that the German economy will register “a slight winter recession.”

The most realistic bet is that the economy probably contracted for the second year in a row in 2024 and the Bundesbank predicts a slight rebound of 0.2% this year. This weakness is one of the central issues of the February 23 elections, in which Social Democratic Chancellor Olaf Scholz will probably be ousted in favor of Friedrich Merz, who leads the conservative CDU/CSU bloc, the main opposition party in power. during the Angela Merkel years.

The social democrat’s mandate, which began in 2021, has been marred by a cursed sequence, with overlapping problems such as the pandemic, the cost of living crisis after Russia’s war in Ukraine and weak Chinese demand for products Germans. A devilish scenario in which the fragility of a tripartite government fueled by divisions between social democrats, greens and liberals has not contributed.

A new chancellor will face growth obstacles similar, with the threat of US tariffs – once Donald Trump returns to the White House later this month – adding to the challenges for Europe’s largest economy. In fact, Trump’s threat could deliver the final blow to an automobile sector that only generates bad headlines (massive layoffs and even the threat of plant closures on national soil, as in the iconic case of Volkswagen).

The division between the parties is great and, although everything indicates that the only formula will be a ‘grand coalition’ between conservatives and social democrats, as in the Merkel era, there will be obstacles. Pandora’s box is the constitutional reform that makes the strict debt brake more flexible so that there can be more investment. But the great parliamentary support it requires will complicate an agreement while the far-right AfD remains strong in the polls as the second force.

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