Following the Price Shock, Manufacturing Shock: "Germany Faces Economic Recession in the Second Half"

The engine of the German economy, exposed to a manufacturing shock following the high inflation shock, was rapidly cooling down. This fact has been reconfirmed by recently released key economic indicators, leading to forecasts that Germany will enter a recession in the second half of this year.

On the 8th (local time), the German Federal Statistical Office announced that industrial production in March decreased by 3.4% compared to the previous month. This is the largest decline in 12 months and significantly below the market expectation of -1.3%. Production slumps were particularly notable in the automobile and auto parts (-6.5%), construction (-4.6%), and machinery and equipment (-3.4%) sectors.

During the same period, factory orders also fell by double digits, down 10.7%. This figure is less than half of what it was before the COVID-19 pandemic and represents a shock compared to the market expectation of -2.3%. Ralph Solvin, an analyst at Commerzbank, Germany’s leading commercial bank, said, "High inflation and high interest rates have suppressed demand for German manufactured goods (automobiles, machinery)," adding, "The shadow of recession is looming over the German economy in the second half of this year, which barely avoided a downturn last winter."

Warnings from the industrial sector continue. BMW, Germany’s leading automaker, issued a warning during a conference call after announcing its earnings on the 4th, stating that the global economic outlook remains uncertain. Oliver Zipse, BMW’s Chief Executive Officer (CEO), pointed out, "Due to the global economic downturn, demand contraction is expected to spread across the industry this year," and noted, "Rising production costs such as raw materials and logistics expenses are also factors weighing down companies."

[Image source=AFP Yonhap News]

The slowdown in the German economy is mainly due to weak production caused by reduced consumption amid high inflation. Since the outbreak of the Ukraine war in February last year, the energy crisis triggered by Russia’s reduction in gas supply combined with high inflation has continued to slow the economy. Germany’s inflation rate soared to 7.2% as of April. While inflation was around 0.5% during the height of the pandemic in 2020, Germany has not escaped a steep upward trend over the past two years.

If the finalized first-quarter gross domestic product (GDP) growth rate, to be announced on the 25th, shows negative growth, it would meet the 'technical requirement' for a recession, defined as two consecutive quarters of negative growth. Germany’s GDP growth rate for the fourth quarter of last year was -0.5%. Karsten Brzeski, chief economist at ING Bank Netherlands, analyzed, "With low industrial production recorded in March, there is a high possibility that the finalized first-quarter GDP growth rate will be revised downward from the preliminary figure of 0% quarter-on-quarter growth."

Bloomberg reported that the German economy is slowing further and is expected to enter a recession in the second half of this year. Accordingly, it seems difficult for Germany to achieve the 'annual 0.4% growth' target set by the government. Just before these economic indicators were released, the German government raised its official growth target for this year to 0.4%. Robert Habeck, Germany’s Minister for Economic Affairs, stated, "The government’s energy subsidy policies introduced after the Russia-Ukraine war helped avoid a recession," and raised the GDP growth forecast for this year from 0.2% to 0.4%.

This content was produced with the assistance of AI translation services.