German production output down for the fifth time in a row

German Industry's Fifth Straight Month of Decrease in Production

In an unexpected turn of events, German industries have faced a decline in production output for the fifth consecutive month. Starting from spring 2023, companies have been producing less, with October's output being 0.4% lower than the previous month. The Federal Statistical Office announced this information on Thursday, contradicting economists' predictions of a 0.2% increase.

"The industrial production slump since spring 2023 shows no signs of slowing down," the Federal Ministry of Economics explained. While certain factors, such as bridge and vacation days, have contributed to this decrease, the overall economic situation remains weak, leaving economists uncertain about a swift recovery. Commerzbank's chief economist, Jörg Krämer, predicts a continued decline in the coming months as companies work to address a downturn in incoming orders following the coronavirus pandemic.

Investigating the Underlying Causes

The automotive industry has played a significant role in Germany's decline, with output dropping by 10% in December 2024. Machine maintenance and assembly also saw a decrease, with a 10.5% drop in December 2024. Energy-intensive industrial branches have experienced a 3.1% output decrease in December 2024.

Global factors, including skyrocketing energy prices, weak external demand, and a dip in competitiveness, are also playing a part in affecting German industries. The country faces deep-rooted structural challenges, including a labor shortage, excessive bureaucracy, and limited investment in both the private and public sectors. Trade policies and uncertainties surrounding Germany's upcoming snap election are further contributing to the economic downturn.

Consumer sentiment and private consumption have remained stagnant since mid-2024. High food and energy prices, combined with concerns about job security, have resulted in a meager 0.3% growth in private consumption in 2024.

Related Articles

• "Industrial production in Germany plunges by 2.4% in December 2024" - DW
• "German Industry: Key Facts and Challenges" - German Chamber of Commerce and Industry
• "German industrial output falls for a second month in a row" - Reuters
• "Produktion im Wirtschaftsreekschlag" - Frankfurter Allgemeine Zeitung
• "Germany is dealing with structural challenges" - Handelsblatt

Enriching the Insight

Several interrelated factors are causing the ongoing German industrial slump, with key industries, such as automotive and machine maintenance, being particularly affected.

1. Energy Shock from Russia:
2. Impact: The halt of natural gas supplies from Russia has resulted in significantly increased energy costs for German industries, with energy-intensive branches like steel, fertilizer, chemicals, and glass bearing the brunt of the impact[4].
3. Current Status: Electricity costs in Germany now stand at 20.3 euro cents per kilowatt hour, compared to just 8.4 euro cents in the U.S. and China. This substantial increase in energy costs has severely impacted German industries' competitiveness[4].
4. China's Emergence as a Competitor:
5. Impact: China's industrial policy, including state subsidies and protectionist measures, has enabled Chinese manufacturers to directly challenge German goods in export markets. This has led to a decline in German exports, particularly in sectors such as automotive and machinery[1][4].
6. Current Status: China's growth in sectors like solar panels, electric vehicles, and EV batteries has led to a decline in market share for German companies like Mercedes-Benz, Volkswagen, and BMW[4].
7. Decrease in Domestic Investment:
8. Impact: German automakers have been shifting their investments from domestic to foreign markets. In 2022, 51% of industry expenditures were allocated to foreign investments, and by 2023, this figure rose to 53%[2].
9. Current Status: The drop in domestic investment is attributed to high energy prices and severe bureaucratic hindrances. This trend raises concern about the future of German manufacturing and the automotive sector[2].
10. Sector-Specific Issues:
11. Impact: The sudden removal of subsidies for electric vehicles by the Scholz government in late 2023 has negatively impacted the electric vehicle industry. Additionally, the construction sector is wrestling with difficulties due to high interest rates, a decrease in orders, and substantial burdens from taxes and bureaucracy[1].
12. Current Status: The construction sector is experiencing an increase in bankruptcies by 17% last year, with the residential sector hit particularly hard[1].
13. Skilled Workforce Shortage:
14. Impact: German companies are struggling to find workers with the necessary skills, including highly trained IT workers, daycare providers, senior care workers, and hotel staff members. This labor shortage is aggravated by a lack of interest in STEM fields among German students and an aging population[4].
15. Current Status: Fewer German students are drawn to STEM fields, and bureaucratic hurdles pose an obstacle to employing highly skilled immigrants. This labor shortage affects various industries, including automotive and machine maintenance[4].
16. Green Industrial Policy and Competitiveness Gap:
17. Impact: Emerging green industrial policies in developed economies, such as the U.S. and China, have led to a competitiveness gap for European industries. China's dominance in clean energy technology manufacturing poses a significant concern for Germany and the EU[3].
18. Current Status: The EU has launched the Net-Zero Industry Act in response to the U.S. IRA, aiming to support domestic green-tech manufacturing. However, this move is part of a broader geopolitical competition where China's industrial policies continue to pose a challenge to European industries[3].

In summary, the ongoing German industrial slump is driven by a mix of factors, including energy price shocks, increased competition from China, declining domestic investment, sector-specific issues, a labor shortage, and a competitiveness gap in green industrial policies. These factors collectively impact key industries, like automotive and machine maintenance, creating significant challenges for Germany's economic recovery.