German Industry Faces Crisis: A Call to Action

Germany’s industrial production continues to decline, sparking concerns even among pessimists.

In July, German industry experienced a 0.8% month-on-month decline, marking the third consecutive monthly drop and contributing to a 2.1% year-on-year decrease in industrial production. Notably, industrial production now lags more than 7% below pre-pandemic levels, despite over three years since the onset of Covid-19.

Energy-intensive sectors also suffered a 0.6% month-on-month reduction in July, with an overall year-on-year decline exceeding 11%. The sole positive note is a 2.6% month-on-month increase in construction activity.

The risk of a recession remains significant. While the economy showed signs of recovery in the second quarter, recent data for July paints a bleak picture, with declining retail sales, exports, and industrial production. Industrial orders have also fallen sharply by nearly 12% month-on-month in July, reflecting the challenge of shrinking order books and high inventories.

Germany has awakened to its waning international competitiveness over the past decade, primarily attributed to insufficient investment and structural reforms. The pandemic and the Ukraine conflict have exacerbated these issues. Recent surveys reveal growing pessimism among German companies regarding their international competitiveness.

In response, German Chancellor Olaf Scholz has called for a “Germany pact” to modernize the country, streamline bureaucracy, and address the economic crisis. This comes after the government announced a modest program to incentivize corporate investment in energy transition, construction, and digitalization, though details remain undisclosed.

Despite the challenges, the sense of urgency has risen, and hopes are pinned on concrete policy actions. Until then, economic stagnation remains the prevailing norm in both the industrial sector and the broader economy.