Germany’s industrial activity has seriously weakened

German factory orders dropped by 4.7% mom in March and production fell by 3.9% that month. Both outcomes were well below consensus expectations. The drop in orders followed a 0.8% decline in February (revised upward from -2.2%), with the weakness concentrated in orders for capital goods (-8.3% mom in March), particularly capital goods from foreign countries outside the eurozone (-19.3% mom). The drop in orders and production in March signals that Germany’s industrial sector lost momentum during the first quarter on the back of the war in Ukraine and ongoing global supply chain disruptions. The fall in orders in February-March was the first consecutive monthly decline since the start of the pandemic in early 2020. The slowdown in Germany’s industrial sector has also be pre-signalled by the falls in Germany’s manufacturing PMI and Ifo business climate in industry in March-April.

However, there still seems to be room for a temporary acceleration in production in the course of this year. Indeed, large backlogs have built up in recent quarters, as production was limited by supply chain bottlenecks and shortages of labour. The European Commission’s recent survey amongst Germany’s industrial companies showed that the volume of order books had reached the equivalent of 4.5 months of production in Q2, which is the highest level since the start of the series in 1985 (see graph). At the same time, the share of companies reporting that the level of production was not limited by any factors (eg. shortage of material and/or equipment or shortage of labour) dropped to an all-time low of 15. As such, production should bounce back once these obstructions ease, which we expect to happen in the course of this year. However, subsequently, we expect the sector to lose momentum again next year, as the global economy and world trade are expected to slow.