Apr 12, 2024 Industrials

Industrial production isn’t the whole story

German manufacturing is not doing as badly as it may seem

German manufacturing is in a mess – that, at least, is the widespread view. Horrifying reports of mass layoffs and plant closures are doing the rounds, giving the impression that deindustrialization is already in full swing across all sectors. But is this correct?

Industrial production is often cited to support this pessimistic view. It measures the total value of all goods produced in the industrial sector (excluding construction). And since peaking at the beginning of 2018, it seems to be heading in only one direction - down, by around 13% five years on, at the end of 2023. The recently released February figure, which was above consensus expectations, does little to change the overall picture.[1]

A too negative picture for German industrial production

* indexed to the 2015 annual average=100

Sources: Haver Analytics, DWS Investment GmbH as of 4/8/24

Another indicator, however, casts a more favorable light on German manufacturing: gross value added. This is calculated with intermediate inputs subtracted so that only the actual value added in the production process is determined. Value added has also fallen, but only by around 5% by end-2023 from the 2018 peak.

In general, Martin Moryson, Chief Economist Europe at DWS, considers gross value added to be the more appropriate indicator for assessing the status quo of the manufacturing industry: " Gross value added, and not production, determines the added value of the economic activity of individual companies and thus of the German economy as a whole".

This does not mean that we expect stunning industrial growth in Germany in the coming quarters. But the situation is by no means as hopeless as it appears to the general public. Using gross value added as a yardstick, it’s apparent that Germany is a long way from deindustrializing.

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1. All data – unless otherwise stated – Bloomberg Finance L.P. as of 4/9/24

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