German industrial production has suffered its biggest annual decline in nine years after the escalating trade war between the US and China took its toll on exports.
Europe’s economic engine, which has increasingly relied on exports to Asia to bolster factory output, was left teetering on the edge of recession in the second quarter after a 1.5% fall in industrial production in June, which is expected to be repeated in July.
Output fell across the three months to June by 1.8% compared with the first quarter of the year, driven by steep drops in metal production, machinery and automobile manufacturing, the economy ministry said.
“Industry remains in an economic downturn,” the ministry said. Production in construction fell 1.1% in the second quarter while energy output dropped 5.9% in the same period.
Analysts blamed the slump largely on a decline in sales of machine parts and cars to China and the far east, where falling currency values have made imports more expensive.
Fiona Cincotta, a senior market analyst at City Index, said: “If traders needed further evidence of the slowing global economy, they only needed to look towards German industrial production figures. As if on cue and adding to traders’ woes, data from Germany showed that industrial production dropped 1.5% month on month in June, significantly worse than the -0.5% decline forecast.”
Fears that the global economy is sliding towards recession have gripped financial markets in recent weeks. A recent escalation of the trade war between the US and China heightened tensions.
Donald Trump threatened to expand the number of Chinese goods affected by punitive tariffs and accused Beijing of being a currency manipulator for allowing the yuan to decline in value. China responded by accusing the US of breaching international trade rules.
The German economy ministry previously welcomed an increase in industrial orders that exceeded expectations in June, but said the sector had not yet reached a turning point, citing Brexit uncertainty as a further reason for caution.
Ralph Solveen, a Commerzbank economist, said the industrial figures supported expectations that the German economy shrank slightly in the second quarter and that manufacturing output was likely to decline in the coming months.
“A look at the individual sectors shows that the crisis in the automotive sector is continuing unabated,” Solveen said, adding that car production had not recovered from the slump caused by problems associated with last year’s switch to a new emissions measurement standard. “However, the main reason for this weakness is now likely to be significantly weaker foreign demand.”
The EU and the German government forecast that the economy will grow by 0.5% this year before rebounding in 2020 to expand by 1.5%. In 2017 the German economy grew by 2.2%.
Andreas Scheuerle, from DekaBank, said the industrial data suggested the economy contracted by 0.2% in the second quarter after expanding by 0.4% in the first three months of the year.
“We assume that this is the prelude to a technical recession,” Scheuerle said. A technical recession is normally defined as at least two quarters of contraction in a row.
The Federal Statistics Office will release preliminary gross domestic product figures for the April-June period next Wednesday.
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