German industrial production drops for third month in a row

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German economy updates

German industrial output has dropped for a third month in a row, in the latest indication that the eurozone’s manufacturing sector is struggling with supply bottlenecks and component shortages.

Production in June fell 1.3 per cent from the previous month to 6.8 per cent below pre-pandemic levels, the German federal statistics agency said on Friday.

Capital goods such as vehicle manufacturing were the biggest drag on output as carmakers found it difficult to source semiconductors. Vehicle production fell 0.9 per cent from May, and was almost a third lower than before the beginning of the pandemic.

Construction activity declined 2.6 per cent, while consumer goods increased 3.4 per cent.

Economists warned that the supply issues would persist through the second half of the year and hinder Germany’s otherwise strong economic rebound from last year’s historic pandemic-driven recession.

“With the manufacturing sector still not firing on all cylinders, there is now a question mark over whether the economy will regain its pre-pandemic level in [the fourth quarter] as we, and many others, have been forecasting,” said Andrew Kenningham, chief Europe economist at Capital Economics.

The German carmakers’ lobby last month cut its production forecast for this year by 400,000 units, warning that the chip shortage could set back European carmaking in the “medium term”.

European leaders have promised to help expand the continent’s chipmaking capacity in response to the global shortage; the EU plans to double its share of the global chip market by 2030. But that will do little to stem the immediate shortages.

The Ifo Institute in Munich said on Friday that German manufacturers across all sectors had reduced their production expectations in July, recording a drop in its index from 27 in June to 22 this month.

“Supply bottlenecks for important intermediate products are now making themselves felt,” said Klaus Wohlrabe, head of surveys at Ifo.

This was consistent with IHS Markit’s purchasing managers’ index, which on Monday reported that although overall German manufacturing activity grew sharply in July, some companies warned that production levels were constrained by materials shortages.

Though pressure on supply chains appeared to ease somewhat, supplier prices rose at a record pace in response to heightened demand, according to the businesses surveyed.

“Backlogs rose at a near-record pace in July and ongoing concerns over supply contributed to the weakest 12-month outlook for production since last December,” said Trevor Balchin, economics director at IHS Markit.

Germany recorded lower-than-expected GDP growth in the second quarter of this year, in contrast with France, Italy and Spain, all of which exceeded economists’ expectations.

Carsten Brzeski, global head of macro at ING, said the persistent slowdown in German manufacturing explained the country’s second-quarter performance. But, he said, “once the supply chain frictions start to dissolve, the . . . industrial production growth will flood out”.

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