German recession fears resurface as factory output falls

A steeper-than-expected drop in German industrial production has led economists to warn that Europe’s biggest economy is likely to slide into recession after factory orders, retail sales and exports also suffered falls. significant.

The German economy weathered the energy crisis triggered by Russia’s large-scale invasion of the Ukraine without the sharp recession feared by many analysts. But recent data suggests that business and consumer activity is being affected by high inflation, rising borrowing costs and slowing trade.

German industrial production fell 3.4 percent in March from the previous month, the biggest drop in 12 months, according to the federal statistical office.

Economists had forecast in a Reuters poll that German industrial production would fall just 1 percent. “These are dismal numbers overall,” said Claus Vistesen, an economist at the Pantheon Macroeconomics research group.

Vistesen said that despite the March drop, first-quarter industrial production was still up 2.4 percent from the previous quarter. But he added: “Unfortunately, the drop in production at the end of the first quarter now leaves a very weak carryover for the second quarter.”

Carsten Brzeski, economist at Dutch bank ING, said lower German industrial production “raised the chances of a downward revision of first-quarter GDP growth.” He added: “Any downward revision would actually mean that the economy had still fallen into recession after all.”

The preliminary forecast for Germany’s first-quarter gross domestic product released on April 23 indicated it had flattened from the previous quarter, an improvement from the 0.4 percent contraction in the final quarter of last year. Revised first-quarter data is due May 25 and a second consecutive quarterly decline in GDP would meet the definition of a technical recession.

The fall in German industrial production reflected falls in most sectors. The biggest drop was a 6.5 percent drop in production among automakers. But output also fell 3.4 percent at machine and equipment makers and 4.6 percent at construction.

German industrial production remains below pre-pandemic levels and pessimism among the country’s manufacturers deepened after a 10.7 percent drop in factory orders in March, which was the biggest monthly drop since that the pandemic closures occurred in April 2020.

The German consumer is pulling back after retail sales in the country fell 2.4 percent in March, the biggest monthly drop of any eurozone country. German exports also plunged in March, falling 5.2 percent from the previous month, hit by particularly sharp declines in shipments to the US and China.

The unexpectedly weak data came just days after German Finance Minister Robert Habeck raised the official growth forecast for this year to 0.4% from 0.2%, saying energy subsidies helped prevent a recession.

But economists expect an unprecedented rise in interest rates, combined with persistently high levels of inflation, to weigh on consumer and business activity in Europe’s industrial heartland for much of this year.

“Therefore, we expect industrial production to continue to fall in the coming months and contribute to the fact that the German economy does not recover in the second half of the year, but rather a mild recession is feared,” said Ralph Solveen, economist at the German lender Commerzbank.

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