Assessing the Latest German Industry Data: Insights on the Recession and Future Outlook

As Germany holds the position of the largest economy in the European Union and is renowned as one of the world's leading manufacturing powerhouses, recent data concerning its manufacturing sector has raised concerns among investors. With Germany already experiencing a technical recession since the first quarter of 2023, there are growing uncertainties about the depth and duration of the downturn. To shed light on these matters, we engage in a conversation with Santa Zvaigzne-Sproge, CFA, to assess the latest data from German industry and its potential implications.

The manufacturing Purchasing Managers' Index (PMI) indicators for both Germany and the entire Euro area are currently situated in the contraction territory, indicating the challenges faced by the manufacturing sector. High inflation and elevated credit costs have led to a decline in private consumption, further impacting manufacturing numbers. Until these factors normalize, a return to expanding private consumption may be hindered.

 

FXMAG.COM: 

How do you assess the latest data from German industry? Do they hint that the recession in Germany will be deep and prolonged? 

 

Santa Zvaigzne-Sproge, CFA: 

As Germany is the largest economy in the European Union and is considered among the strongest manufacturing powerhouses in the world, the latest manufacturing data may cause some worry among investors. 

Germany has been in a technical recession since the first quarter of 2023 and is expected to continue the contraction at least till the end of 2023. However, for the technical recession to be over in Germany by the end of 2023, we should start seeing some improvement in economic indicators such as the PMI soon. Meanwhile, both – Germany’s and the whole Euro area’s – manufacturing PMI indicators are deep in the contraction territory. 

 

Private consumption in Germany has fallen mainly due to high inflation and more expensive credit, which has led to lower manufacturing numbers. Therefore, until neither of the factors has normalized, private consumption may not return to a more expanding territory. 

 

Until now, the German economy’s contraction has been relatively mild with -0.3% GDP growth in the first quarter. However, comparing it to the initially expected +0.3% and the preliminary estimate of -0.1%, we may see that the actual data tend to turn out worse than expected. The GDP growth estimate for a full 2023 year in Germany now stands at -0.4%, however, it might be revisited as the second quarter GDP growth estimates start coming in. 

 

On the bright side, German companies hired people at a faster pace in June than one month ago (which cannot be said about France, Italy, or Spain). Healthy employment is an important factor to support private consumption and at the same time an indicator that recession in Germany is kept at a relatively mild level. 

 

To sum up, current German PMI data do not signal that a turnaround in the second quarter GDP growth data is likely. This may lead to slightly lowered expectations for full-year GDP growth in Germany. However, the length of a recession in Germany may be hard to assess based on the PMI data. It may be more dependent on future monetary and fiscal decisions by policymakers in the rest of the year’s time.