Is German industry approaching a trough? - 18 September 2023
German industry suffered considerably as a result of the energy shock of 2022. Recent figures may give the impression that there has been no improvement, but that is not quite true.
Germany’s manufacturing PMI fell below 40 this summer, signalling that the country has suffered the most marked industrial contraction of all developed countries. This is confirmed by the ifo Business Climate Index for Germany, which fell in August to a new low point for this cycle (cf. chart 1). While industrial slowdown is a global phenomenon, it has particularly affected German industry, whose competitiveness had already been in decline since 2018 (especially in the automotive sector), and which suffered the full impact of the 2022 natural gas crisis. This is all the more important for the German economy because added value from industry represents around 20% of its GDP, compared with 12% on average for other eurozone countries.
A study published by the IMF this summer suggests that the 2022 energy crisis would knock about 1.2% off potential German GDP, mainly due to the shock impacting the most energy-intensive industries (chemistry, metallurgy etc.). Production in these sectors has plunged by 17% since Russia’s invasion of Ukraine, almost as much as during the Great Recession of 2008/09 (cf. chart 2).
However, the study highlights several positive points, including the quick and significant improvement in industry energy efficiency, and the fact that the majority of the negative impact on GDP had already been seen in 2022. The fall in energy prices compared to last summer has also alleviated pressure. In fact, the real (inflation-adjusted) price of natural gas imported into Germany has almost returned to its historical average (cf. chart 3). This has enabled Germany to regain a comfortable trade surplus of more than €110 billion since the beginning of the year.
In this context, the recent sharp rise in oil prices is not good news. However, it will have only a moderate impact, with oil accounting for less than 20% of the energy used by German industry. Furthermore, natural gas and coal prices remain stable for the time being, at levels close to the low point reached in spring.
Barring another external shock, it is thus possible – or even probable – that, after its dizzying fall, production in the most energy-intensive German industries will begin to recover in the coming months. Such a scenario would help to stabilise the German economy and mitigate the recent growth struggle in Europe.