Euro Macro: German industrial data - Weak demand keeps rebound hopes on hold for now

Recent data suggest that the optimism at the start of the year about a bottoming out in the German industrial sector might have started a bit too soon. Indeed, the output and new orders components of the June manufacturing PMI (see here) already showed the picture is not improving at the end of Q2. While past headwinds such as high energy prices and loss of competitiveness have eased considerably – leading to an improving sentiment –, they are not gone yet (see graph below). Weak demand is preventing the sector from moving into recovery mode. Zooming out, this is not surprising, given that global trade is only in the early stages of recovery and monetary policy is still very restrictive.

While overall industrial demand is down, consumer demand remains a bright spot. The overall decline in new factory orders in May was driven by lower orders for capital and intermediate goods, while consumer goods orders expanded compared to Q4 2023. Rising real incomes and a solid labour market have increased consumer activity and demand. This split is likely widening further in the coming months as the purchasing power recovery of households continues, while the turnaround in demand for capital goods is likely further away. The decline in industrial production (including construction) in May puts production back at December 2023 levels, undoing the increases we have seen in the first half of 2024. The decline was broad-based in most subsectors.

All in all, this confirms our picture of the unbalanced growth profile in the German economy for 2024. Consumer demand and the services sector are driving growth, while the manufacturing sector is further away from recovery than previously thought. We currently see German GDP expanding by 0.2% in Q2. (Jan-Paul van de Kerke)