Germany faces ‘exceptionally difficult years’

German industrial production unexpectedly fell in May, raising fears of a prolonged downturn in the EU’s top economy, data from the federal statistics agency Destatis showed on Friday.

Output slipped by 0.2% compared to the previous month, as a 13% drop in pharmaceuticals outweighed increased vehicle production.

Chief economist at ING, Carsten Brzeski, warned the latest data indicated that “German industry is still stuck in stagnation.” He pointed to a “toxic combination” of poor outlook, a lack of orders and the need to build up inventories further amid structural factors such as the conflict in Ukraine and the transition to green energy.

“The country’s international competitiveness has already deteriorated in recent years and is likely to deteriorate further,” Brzeski said.

German manufacturing needs an activity surge in June to avoid an extension of the recession, he added, as May’s figure was affected in particular by a 7% decline in the energy sector.

Meanwhile the latest report suggests Germany’s manufacturing slump may be enduring.

“Data for the first two months of the second quarter have not taken away the risk of a further contraction of the German economy,” Brzeski noted.

The economist said the current decline marks the first time since 2008 that German economy shrank for more than two consecutive quarters.

The country’s GDP fell by 0.3% in the first quarter of 2023, after a 0.5% contraction in the last quarter of 2022.

The Bundesbank earlier predicted that the recession in Germany would end soon, expecting a return to growth by the end of the year, but economists warn of a further decline.

“We may just see stagnation in the second quarter, but much more likely a renewed decline in economic output,” LBBW bank analyst Jens-Oliver Niklasch said.

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