During Q4 2022 and Q1 2023, the German economy experienced a recession, and this was large enough to drag the whole eurozone GDP growth into it. While German GDP contracted, this was mainly due to consumer spending, after an inflation spike to 11.6% year-on-year in October 2022.
However, the main big story is in our view the following one: German growth has been underperforming since late 2017. As a result, even though GDP for Q1 2023 was 0.5% below its pre-Covid level, it is also only 0.6% higher than the figure posted for Q4 2017, compared to 3.7% in France.
Germany's main weak link is its manufacturing industry, where the output decreased by 7% between late 2017 and Q1 2023. While the production challenges in the car manufacturing industry are well known and have resulted in a drop of almost 11% of the sector’s output, the metals’ output is down by the same amount and the chemicals sector production, one of the key strengths of the country's economy, is down by almost 15%.
Unsurprisingly, the fall in production is reflected in the fall in demand, with a 9.2% drop in new industrial orders over the same period. Against this background, supply-side constraints are the main factors limiting production for almost 47% of manufacturing firms in Germany, compared with 34% in France and 36% in the eurozone.
Labour shortages are playing a clear role too. However, at the same time, have companies also potentially underinvested in their capacities? In Q1 2023, machinery and equipment investment was just above its 2017 level by 0.7%. Meanwhile in France, this type of investment increased by 7.2% over the same period.
As a result, Germany – known for its large manufacturing sector – saw its manufacturing production capacities fall by almost 6% compared to its pre-Covid levels, having been hit hard by rising energy costs in particular.
In summary, the underperformance of the German industrial sector is reflected in GDP growth statistics. When growth is weak in others eurozone economies, German GDP shrinks. That's what was happening during Q4 2022 and Q1 2023, and it may happen again during the second half of 2023.
