German industrial production showed surprising resilience in the fourth quarter of 2024, rising by 0.9% quarter-on-quarter despite a sharper-than-expected decline in December. The December drop, amounting to 1.9% month-on-month, was largely attributable to weakness in the automotive sector, but it masks underlying improvements in other areas of the industry, according to recent data.
A Complex Picture of Recovery
The overall industrial output – encompassing manufacturing, energy, and construction – contracted by 1.2% in 2023, marking the second consecutive annual decline and the fourth in the last five years. This places output roughly 9% below its record high. However, the fourth-quarter rebound suggests a potential turning point, albeit a fragile one.
The December decline was particularly pronounced in manufacturing, falling 3% month-on-month. Within manufacturing, the automotive industry experienced a significant slump of 8.9% in December, alongside a substantial decrease in maintenance-related industrial activity (down 8%). However, several other industrial sectors demonstrated positive momentum. Production of transport equipment surged by 11.1% month-on-month, while metallic products and electronics saw increases of 2.4% and 3.1%, respectively.
Construction also contributed to the overall positive trend, with a notable increase of 3% in December and a 1.9% rise across the entire fourth quarter. Civil engineering, in particular, experienced its best quarter since the beginning of the data series in 1991, growing by 1.7% quarter-on-quarter.
Demand Dynamics and Export Outlook
The positive fourth-quarter figures are being driven by a strengthening in domestic demand, signaled by a marked rebound in new orders for capital goods in the final two months of the year. This suggests a shift towards a more domestically-led industrial cycle. Simultaneously, there are indications of a potential recovery in exports, with a solid increase recorded in December, although the growth in new export orders was less pronounced than the domestic surge.
Recent Weakness and Broader Economic Context
Despite the fourth-quarter improvement, German industry ended 2024 on a weak footing. Industrial production fell by 2.4% month-on-month in December, following a 1.3% increase in November. Year-on-year, industrial production was down by more than 3%. This follows a period of prolonged weakness, with German industrial production remaining approximately 10% below pre-pandemic levels, even five years after the onset of the COVID-19 pandemic.
Capacity utilization within the manufacturing sector is currently at levels comparable to those seen during the financial crisis and the initial pandemic lockdowns, painting a concerning picture for a nation traditionally known as an industrial powerhouse. Inventory levels remain elevated, having been at high levels for over a year, while order books, though showing signs of bottoming out, are not yet sufficiently filled to trigger a substantial turnaround in the inventory cycle.
Challenges on the Horizon
Looking ahead, the outlook for German industry remains uncertain. Beyond potential technical rebounds, a substantial recovery is not currently in sight. The combination of elevated inventories and insufficient order flow presents a significant challenge. The prospect of new tariffs and potential protectionist policies from the United States adds to the headwinds facing German exporters.
The Bundesbank’s Monthly Report highlighted that German economic output fell significantly in the fourth quarter of 2024, driven by declining exports and weak industrial output, particularly in the automotive and energy-intensive sectors. While private and government consumption expenditure increased, the labor market suggests a continued slowdown.
Despite the December dip, German industrial production rose by the most in 11 quarters in the fourth quarter, indicating a potential shift in momentum. However, the sustainability of this improvement remains to be seen, given the broader economic challenges and the uncertain global trade environment.
The data suggests that while the German industrial sector is showing signs of emerging from recession, the recovery is uneven and faces considerable risks. The interplay between domestic demand, export performance, and global economic conditions will be crucial in determining the trajectory of German industry in the coming months.
