Germany's Recession Headache Exacerbated by Shrinking Car Production

Choppy waters are on the horizon for the German economy, which is already in a technical recession, with shrinking automotive sector and construction output a major drag, according to the nation's Federal Statistical Office (Destatis).

The economic woes of Europe’s main industrial economy, which have been piling up in no small part due to blowback from its barrage of anti-Russian sanctions, are currently indicating that another contraction can be expected later this year, economists at Capital Economics and Commerzbank are cited as warning.

As it is, Germany is in a technical recession, with its gross domestic product (GDP) tumbling over two consecutive quarters - by 0.5 percent in last year's final quarter and then by 0.5 percent in the first quarter of 2023. Now, a 3.5-percent drop in Germany’s huge automotive sector has driven a 1.5 decline in industrial production in June as compared with May, official figures show. Output also shrank by 2.8 percent in the construction sector, also taking its toll on overall industrial production, Destatis said.

Prospects appear to be particularly dim when it comes to Germany’s car industry, which accounts for close to 5 percent of its economy. There has been a massive decline in automotive production over the last few years, feeding into the already stagnating industrial production. Figures show that after peaking at around six million back in 2012, since then car production in Germany has followed a stubbornly downward trend, exacerbated by the COVID-19 pandemic that snarled supply chains. German car production has a 30-year low, with just some 2.2 million cars rolling off production lines in the first half of 2023, according to the German Automotive Industry Association.

Pushed out by local competitors, Volkswagen (VLKAF) has come up against sluggish sales in its biggest vehicle export market – China, with a 14.5 percent drop in its deliveries to the Asian giant in the first quarter.

Hildegard Müller, President of the German Association of the Automotive Industry, warned in a statement in July that due to the current economic situation and the “development of incoming orders,” growth rates would soon be slowing down as the order backlog was being reduced.

It is evident from the hard-hitting figures that the decline of car manufacturing is hurting the German economy. It should be noted that the nation, along with other EU member states, has been up against accelerating inflation as part of the post-pandemic global economic recession. The situation was further exacerbated by sweeping anti-Russian sanctions that resulted in a disruption of supply chains that led to a raging energy crisis in Western economies.

Rising interest rates in the Eurozone and the US, coupled with weak export markets, are predicted to further contribute to Germany's economic troubles through the end of the year, according to economic research center ZEW. In the latest World Economic Outlook, the International Monetary Fund projected the German economy to contract 0.3 percent this year before rebounding 1.3 percent in 2024.

The European industrial behemoth has suffered the most painful blowback from the West’s attempt to "cripple" Russia's economy for its special military operation in Ukraine. Berlin's industrial output slumped and the country sank into a recession earlier this year after losing access to the reliable, low cost and abundant energy supplies from Moscow that have been pivotal to German industrial sector development.

As per international economic observers, the economic slowdown caused largely by the disruption of Germany's energy ties to Russia is contributing to gradual de-industrialization, and may be perceived as yet the first falling "domino" in the European Union. The destruction of Russia's Nord Stream pipeline network, Berlin's opting to join the collective West's energy sanctions against Russia, the pushing forward of the so-called “green” agenda by replacing fossil fuels, economists have previously told Sputnik, may result in an even sharper economic decline for Germany.