Looking ahead, there is still a slight chance of a surprise rebound in German industry. The government’s measures to support domestic investments by faster depreciations have only kicked in towards the end of July. At least die-hard optimists will still stick to the view that the turning of the inventory cycle was only halted by recent trade developments, but not cancelled.
At the same time, however, last week’s industrial orders data disappointed and once again showed that domestic demand in Germany, in particular, remains weak. When looking further ahead, the coming weeks and months are likely to show more of the adverse impact of US tariffs on German exports. Specifically, the German Mittelstand could become a victim of US tariffs, as these hidden champions will have more trouble relocating production than big corporates. But it’s not only the Mittelstand. The latest US decision to expand the 50% metals tariff to products containing steel and aluminium has reportedly led to European companies halting exports to the US. Add to that the stronger euro exchange rate – not only against the US dollar, but many other currencies – and it is hard to see how the export-dependent German economy will be able to get out of seemingly never-ending stagnation in the second half of the year.
All of this means that all hopes for a sustainable German recovery are on fiscal stimulus. In this regard, however, the government currently needs to be careful not to undermine the positive impact of fiscal stimulus for infrastructure and defence. Last week’s announcement of yet another summit between the government and the steel and automotive industries suggests that the government still lacks a plan on how to bring the German economy into the 21st century. Instead, it seems to be desperately trying to support the industries of the 20th century. Also, the current political debate in Germany on possible austerity measures could undermine the – at least psychological – impact of the announced fiscal stimulus for infrastructure and defence. As much as we subscribe to the need for sustainable public finances and structural reforms for the economy and the budget, it is a debate that would benefit from swift decisions. A brief look towards the neighbour in the West would help. The longer a debate on potential austerity measures lasts, the higher the risk that households and companies will hold back spending and investment decisions – a risk factor that financial markets seem to have missed so far.
All in all, it is hard to derive a clear trend from highly (and more than usual) volatile and often heavily revised monthly industrial data these days. Trying to look through this volatility, the hopes for at least a cyclical rebound in German industry remain alive, even though the disappointments of the last few years warn against any premature optimism.