German industrial production unexpectedly fell in May 2023, casting a shadow over the recovery in Europe’s largest economy from its recent recession.

Output dropped 0.2% from April 2023 as a decline in pharmaceuticals outweighed more vehicle manufacturing, according to the Wiesbaden-based statistics office. The median prediction in a Bloomberg survey of economists anticipated stagnation. From 2022, production was up 0.7%.

The report suggests Germany’s manufacturing slump may be enduring and continuing to weigh on growth after already dragging the economy into a recession that lasted through the first three months of 2023.

“Data for the first two months of the second quarter have not taken away the risk of a further contraction of the German economy,” Carsten Brzeski, a Frankfurt-based economist at ING, said in a report. “This would make it the first time since 2008 that the economy shrinks for more than two consecutive quarters.”

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In contrast with a July 6 report that showed a rebound in factory orders, the data points to signs of continuing deterioration that chime with a recent litany of dire news from German businesses.

An index measuring companies’ outlooks compiled by the Ifo Institute in Munich fell during June to the lowest levels seen in 2023 while carmakers in particular are the most pessimistic since 2008. Weak global demand is persisting, according to the country’s leading engineering industry lobby.

What Bloomberg Economics Says...

“With another small setback in May, German industry is unlikely to give a push to GDP growth in the second quarter. High energy prices, tighter financing conditions and weaker global demand represent a material drag on industrial activity, which might persist well into 2024,” said economist Martin Ademmer.

So far, a large backlog of work amassed when bottlenecks hobbled global supply chains has been supporting production at German factories. But that cushion is shrinking, raising questions over whether current activity levels can be sustained.

Chancellor Olaf Scholz’s top economic adviser, Joerg Kukies, said the country’s construction sector is being hit by the European Central Bank’s monetary tightening campaign to combat inflation.

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The absence of a rebound in China is also having an impact given Germany’s high level of exposure to the world’s second-biggest economy, he said at a July 7 economic conference in Aix-en-Provence, France.

“A lot of our base materials, a lot of our machine-tool industry and a lot of the leading indicators of exposure to Chinese growth — and of course also global growth — are slowing down,” Kukies added. Still, the German economy is showing strong resilience, he said.

Production weakness would be consistent with the Bundesbank’s assessment in June, when it said that the economy probably returned to growth in the current quarter, expanding “slightly,” though against a tough backdrop at factories.

The headwinds faced by Germany’s manufacturing base, the backbone of the continent’s wider industrial complex, also include sinking water levels on the Rhine River, a key transport artery for heavy goods. Borrowing costs are likely to rise further, meanwhile, with the ECB all but certain to raise interest rates again at its next meeting on 27 July.