German economy in trouble

Germany’s Federal Statistics Office said on May 6 that German manufacturing output fell 3.9% in March from the previous month, after adjusting for inflation and seasonal factors. This is the biggest monthly drop since the pandemic emerged.

The auto sector led the decline, with output down 14% and now down to 63% of pre-pandemic levels, according to Capital Economics. “We think this is the start of a manufacturing slump, potentially dragging the entire economy into a recession,” said Andrew Kenningham, chief economist at Capital Economics.

Bayerische Motoren Werke this week reported that production in the first three months of the year fell by 19% compared to the same period in 2021. The reason was the global supply bottleneck of components, as well as the blockade in China. BMW said sales fell about 9% in China in the first quarter, but increased about 4% in the US compared to the first quarter of 2021.

German producers face new challenges in the coming months, as the European Union restricts Russian energy imports and the European Central Bank prepares to raise interest rates. German orders were quite strong at the beginning of the year, but have been falling since then.

According to a recent survey by the Munich-based IFO organization, almost 80% of German industrial companies are complaining about bottlenecks in their supply chains and difficulty procuring raw materials. This number is now near a record high. “We expect the challenging market environment in mainland China to persist,” Adidas CEO Kasper Rorsted said on May 6.

The sportswear maker revealed that sales in China fell 35% in the first three months of the year compared to the same period in 2021, as the market was hit by the lockdown. The company’s gross margin also declined, mainly due to the significant increase in sourcing and freight costs.

Meanwhile, soaring inflation is worrying consumers. Optimism in the economy has fallen to historic lows, according to a survey late last month by the GFK Institute. German inflation hit 7.4% in April – the highest since 1981.

Germany’s federal statistics agency said Europe’s largest economy grew 0.2 percent in the first three months of the year, but still about 0.9 percent below pre-pandemic levels. The German government recently lowered its 2022 growth forecast to 2.2%, lower than the 3.6% it made in January, due to the Ukraine crisis and its impact on inflation.

Session An (according to WSJ)