The German industrial landscape presents a mixed bag of signals as we dive into 2024. While recent reports indicate a modest rebound in industrial production, the situation is nuanced and far from a complete recoveryThe Federal Statistical Office of Germany has announced that in November 2024, industrial production grew by 1.5% compared to the previous month, and exports rebounded from a decline of 2.8% in October to a positive growth of 2.1% in NovemberThese figures might suggest a glimmer of hope; however, they must be interpreted with caution.

On the same day, the Ifo Institute for Economic Research released data highlighting a concerning trend within Germany's pivotal automotive sectorThe business climate index for the automobile industry deteriorated further, dropping from -32.4 points in November to -34.7 points in December 2024. This decline raises questions about the underlying stability and sustainability of the newly reported growth dynamics.

Oxford Economics Chief Economist Clár argues that the uptick in industrial data for November can largely be attributed to one-off factors, making the continuity of this growth suspect

He emphasized that macroeconomic headwinds remain intact, including weak export demand and various structural obstaclesAdditionally, leading indicators continue to show dismal performance, suggesting that the optimism may be misplaced.

Clár elaborated on the dual pressures facing German export demandFirstly, there are cyclical factors at playAs borrowing costs and inflation decrease across Europe, it is anticipated that consumers will allocate more of their income to substantial purchases, including high-value items financed through debt, potentially benefiting German industryHowever, structural challenges loom large, including heightened international competition, over-reliance on exports, and the looming threats of American protectionism.

But can this recovery momentum be sustained? The Federal Statistical Office's reports reveal a significant disparity when comparing the recent industrial production figures to the same timeframe in 2023; industrial output remains 2.8% below last year, while the total export value has decreased by 3.5% compared to 2023, standing at €127.3 billion

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Nevertheless, certain sectors within the industry showcased remarkable performance, such as the heavy-duty transport segment, which includes shipping and rail, witnessing an 11.4% increase in production, while the energy sector experienced a 5.6% growth.

According to Clár's analysis, while November's month-on-month industrial production grew by 1.3%, adjusted for construction, the figure rises to 1.5%. This growth was seen across all major sectors, yet he warns that this seemingly positive trend was primarily driven by seasonal factorsAn increase in working days stemming from school vacation realignments and mild weather conditions that facilitated construction activity contributed significantly to this scenario.

Looking ahead, Clár suggests that given the robust structural challenges and persistently lackluster leading indicators facing Germany, a consistent revival of the industrial sector appears unlikely

Forecasting for the fourth quarter of 2024, he indicates that the industrial sector is likely to continue dragging down overall economic growth ratesNevertheless, due to unexpectedly strong retail data from the third quarter and favorable trade information for November, prior projections of a zero growth rate for Germany's GDP in the fourth quarter may need to be revised upward.

Underlying structural hurdles include an over-dependence on export markets, high energy costs, and a shortage of skilled laborAdditionally, the landscape of global manufacturing is shifting, resulting in increased international competition that challenges Germany's traditional industries.

For the past few years, Germany's economy has stagnatedAccording to data from investment bank Goldman Sachs, since the end of 2019, Germany's real GDP has essentially remained static while the Eurozone experienced a 5% growth and the United States achieved an 11% increase during the same period

Forecasts for Germany's GDP growth in 2025 hover at a mere 0.3%, sharply contrasting with predictions for the Eurozone and the UK, which are at 0.8% and 1.2%, respectively.

Goldman Sachs's Chief Economist for Europe, Stern, expresses profound concern regarding the German economic outlook, emphasizing that these structural impediments are not likely to dissipate by 2025. A significant factor to watch is the possibility of renewed trade tensions ignited by the United States, which could leave Germany—a highly open and industrially reliant economy—vulnerable.

As the Ifo Institute reported in December 2024, the business expectations index for the automotive industry plummeted dramatically from -30.9 points in November to -37.1 points in DecemberThis decline, coupled with a drop in the export expectations index by 1.2 points to -20.3 points, reflects a clouded future for the sector

According to Ifo industry expert Wölfer, this decline primarily stems from significant pessimism among enterprises regarding future expectations.

Moreover, many automotive companies are voicing concerns about insufficient order backlogs to fully utilize their production capacities, while prospects for stimulating overseas markets appear bleak.

The employment situation within Germany's automotive industry continues to deteriorate, with the employment expectations index falling from -33.9 in November to -36.7 in DecemberWölfer highlights that the number of companies discussing potential layoffs is on the rise, indicating a troubling trend.

For instance, reports indicate that Volkswagen, Europe’s largest automobile manufacturer, reached an agreement with unions on December 20, 2024, to lay off 35,000 workers in Germany and reduce factory production by nearly a quarter

Similarly, Schaeffler, a prominent manufacturer of machinery and automotive parts in Germany, announced plans to lay off 4,700 employees in Europe, primarily in Germany.

Wölfer asserts that the current economic and structural climate is hitting the automotive sector hardWhile this economic downturn directly correlates with broader domestic and international economic conditions, compounded by global uncertainty, the automotive industry is simultaneously undergoing profound structural changes, particularly as it transitions toward electric vehicles—an evolution that poses its own set of challenges.

He points out that these changes are occurring against a backdrop of significant macroeconomic structural transformations including decarbonization, digitalization, demographic shifts, and heightened competition from companies, particularly in China, all triggering a structural adjustment process in Germany that stifles growth prospects.

Despite the current industry slump, Wölfer believes that it does not signify the end for Germany's automotive industry

While the transition to electric vehicles may pave a challenging road ahead, German automotive manufacturers possess resilience and innovation capabilities that could see them catch up significantly in areas such as electric vehicle production and sales.

Industry expert Blazeler from the German Automotive Management Center reflects that the current crisis within the automotive sector exemplifies "a multifaceted crisis in Germany," and recovery will take timeHe underlines, "The next two to three years will be a major challenge, necessitating simultaneous resolutions to numerous structural issues."

In this ongoing narrative of predictions and challenges, Professor Schwop from the University of Applied Sciences for SMEs asserts that there is still "a glimmer of hope" for German automakersHe anticipates that the current sluggish electric vehicle sales in Germany and Europe could gain substantial momentum by 2025 or, at the latest, 2026.