#MacroFriday: The Continued Downtrend in German Industrial Production

 

I would prefer not to touch upon this sore spot, but unfortunately the current environment leaves me with no other choice. Despite some fragile survey-based optimism about the European industry, industrial production continues to trend lower in the eurozone.

 

Last week in our MacroFriday, we discussed industrial production in the US, which showed a decade without growth once we exclude High-Tech developments. This week, we look at industrial production in the eurozone. Yesterday, Eurostat released the industrial production data for September. Industrial production in the Euro Area recovered slightly in September (+0,2%) after the sharp decline in August (-1,1%). German industrial production contracted by -4,4% in August and recovered only +1,9% in September, another blow to the already hard-hit German manufacturing sector. Overall, German industrial production is now down more than 13% compared with the pre-pandemic period and more than 18% (!) since the industrial boom in 2017. Production volumes in the energy-intensive industry branches are down by almost 25% since their peak, a shockingly large decline. 

 

Still, some signs of optimism can be found in recent surveys of the manufacturing sector. After three years of continued deterioration in the European Manufacturing PMI, the latest data showed no further contraction in output.  Unfortunately, the outlook remains cautious. Trade uncertainties continue to hang like dark clouds over the sector, while the stronger euro, which is up against both the USD (+12%) and the Chinese renminbi (+9%) in 2025, is likely to put additional pressure on exports. Investors, however, have clearly become more optimistic, as industrials companies are now among the best-performing sectors in European equity markets. Valuations have rerated, but we still need to see whether earnings can catch up in current environment.