Black series for German industry. After a slight drop of 0.1% in May, it fell again in June, and this time by 1.5%, according to the statistical office Destatis. However, not all sectors are in the red: the production of consumer goods increased by 1.8% and that of intermediate goods by 0.4%. But this progress was not enough to mask the erosion of two key sectors for industry across the Rhine. The automobile, symbol of “Deutsche Qualität”, fell by 3.5% and capital goods by 1.3%. Used to manufacture other goods in the aeronautical, naval or railway sectors, these include machine tools that are highly prized abroad and on which Germany bases its industrial future.
This weakening of industry, the mainstay of the country’s economy, is more serious than expected. Financial analysts surveyed by Factset, quoted by AFP, expected an average drop of 0.5%. Since the start of the war in Ukraine, German industrial production has been declining and despite some recent “important contracts” in aeronautics, “the outlook for the industrial situation is still bleak”, warned the Ministry of the Economy in a press release.
Three reasons explain these poor results. First, German domestic demand has fallen, due to an inflation rate that is admittedly stable, but still high. It remained at 6.4% in June, a figure not seen since the 1950s and higher than other European countries, such as France, which then fell to 5.3%. The rise in interest rates by the European Central Bank also makes borrowing more difficult for companies and households, which consume fewer products “made in Germany”. Second problem, the decline in Chinese and American demand. These countries are Germany’s two largest trading partners. Crucial markets therefore, but which now prefer to turn to their domestic industry, which they subsidize heavily, to be more independent and stimulate their economy.
High electricity prices
Finally, German industry suffers from electricity prices that are still very high compared to the European average. Having decided to abandon nuclear, forced to give up Russian gas, and looking to get out of coal, Berlin has invested heavily in renewable energy, which has inflated electricity bills and made the country less attractive to foreign companies. . The EY barometer placed Germany in third position in its ranking of the most attractive countries in Europe last May, behind France and the United Kingdom.
Some industrial sectors still experienced growth in June, such as chemicals (+ 3.5%), but other energy-intensive sectors continued to decline. This is particularly the case for the production and processing of metals (-3.1%), paper and cardboard (-2.3%) and glass and ceramics (-0.7%). Not only is the industry far from regaining its pre-war level in Ukraine, but companies could also leave for countries where energy is cheaper. The Federation of German Industry (BDI) warned at the beginning of June that 16% of the companies it had questioned were in the process of relocating part of their production, and that a third were seriously considering it.
To extinguish the fire, the Green Minister for the Economy and Climate, Robert Habeck, had proposed to subsidize electricity for industrial use in order to make it more affordable. But this measure was swept aside by the Minister of Finance, the liberal Christian Lindner, and by Chancellor Olaf Scholz. In addition to several economists, who consider it costly and inefficient in the long term, this electricity pricing has not been well received by the European Union either. Competition Commissioner Margrethe Vestager called for “caution”, arguing that such government support would create a distortion between Germany and smaller European countries, which do not have the same means to support their economy. in the face of the energy crisis. Especially since our neighbor across the Rhine already protects its businesses a lot. Since March 2022, the countries of the European Union have spent 740.9 billion euros on state aid, and Germany accounts for half of this, far ahead of France (22.6%) and Italy ( 7.7%).
The slowdown in the German economy seems set to continue over the rest of 2023. “The 1.5% drop in industrial production in June gives a taste of the bad figures looming ahead horizon for the months to come”, commented Commerzbank’s chief economist, Jörg Krämer. Germany has already entered a recession, with its GDP falling by 0.4% in the first quarter. The economic research institute IFO plans confirmation of this trend over the yearwith a decline of -0.1% in 2023. This is enough to worry the one that was long considered the “locomotive” of Europe.