German industry struggles to gain momentum
Dr. Nils Jannsen, Head of German Economic Outlook at the Kiel Institute, comments on the latest figures released by the Federal Statistical Office showing that industrial production increased by 0.6 percent in August:
"A recovery in industrial production remains elusive. The increase in August only partly offset the sharp decline in July. Business sentiment in the manufacturing sector has improved markedly of late, and despite substantial month-to-month volatility, new orders are trending upward, although this has so far been driven mainly by large orders. However, there are still no signs of a broad-based recovery in production.
The low water levels on the Rhine, which have persisted since mid-July, are disrupting inland waterway transport and thereby weighing on production. Estimates based on previous low-water periods suggest that industrial production is reduced by more than 1 percent in a month with 30 low-water days. One reason to expect the impact of the current low water levels to be smaller is that affected companies have diversified their transport routes and reduced their reliance on inland shipping since the severe low-water period of 2018. The unusually low level of capacity utilization in industry also points to a more limited impact, as lower transport demand means that bottlenecks are likely to have a smaller effect on production. On the other hand, water levels have recently been considerably lower in some cases than during previous low-water periods, pointing to potentially more severe disruptions. Current water-level forecasts suggest that the low-water period will persist at least well into October. In 2018, conditions did not improve until December.
The low water levels are hitting German industry at a time when it is being pulled in opposite directions. The global AI boom and rising defense spending are creating new sales opportunities for parts of the industrial sector. More recently, the repercussions of the war in Iran also appear to have boosted business in some industries, as German companies are less dependent on supplies from the Gulf region than competitors elsewhere. Precautionary orders in anticipation of possible war-related supply disruptions are also likely to have supported demand. At the same time, persistent competitiveness problems remain and are likely to lead to further losses in market share despite the recent improvement in export business."
