Different sections of German industry will begin their economic recovery at different times, write Eric Heymann and Tobias Just of Deutsch Bank Research.
The following contribution was authored by Eric Heymann and Tobias Just of Deutsche Bank Research.
"The manufacturing industry in Germany has recovered strongly from the deepest recession in its history. However, the road back to former output and order levels is still very long. Two years after the beginning of the crisis, the current production level, for instance, is still roughly 17% below the historical peak.
Looking forward, we expect a further increase in orders and production in the German industry during the next few months. However, the momentum is expected to slow down since economic stimulus packages all over the world are currently fading out. And again, foreign demand is driving the momentum in most sectors, particularly in the investment goods industries.
Order intake in the entire German manufacturing industry has recovered by almost one quarter since the latest trough. Stronger impetus has been coming from foreign orders due to higher economic momentum outside of Germany and the recent weakness of the euro.
Capacities still under-utilised: Employment quite stable
With regard to the tremendous drop in output, orders and capacity utilisation in German manufacturing, it is more than surprising that employment in this sector remained relatively stable during the latest recession.
The number of people employed in German industry declined by only 7% between autumn 2008 and the first quarter of 2010. The extension of the short-time working scheme and flexible labour contracts prevented a much more serious slump in employment.
Another reason is that many German companies had benefited from a very positive economic environment prior to the recession. Moderate wage increases helped the sector to increase its competitiveness and eased pressure to release more employees.
We expect a further increase in orders and production in German industry during the next few months. However, the momentum could be slowed down since economic stimulus packages all over the world are currently cut back.
The automotive industry has rebounded strongly during the last few months: at the end of the first quarter of 2010, output was almost one-third above the level registered when the trough was reached in H1 2009.
The fast recovery is linked to the fact that many car factories were shut down temporarily due to declining demand in order to avoid an excess of supply; as a result backlog was quite high. The chemical industry, which is usually ahead of the business cycle, has also expanded its production since the economic trough, namely by roughly 25%. The recent output level lies only 8% below the historical peak.
Considering the muted growth outlook for Germany for 2011, however, this still implies that we can expect positive growth for most German industries in 2011, although somewhat lower than in 2010.
But hopes that the economic upswing in Asia and the US alone will lead the German industry back to pre-crisis output levels will still be dashed – at least in the short term. It will take a minimum of two to three more years until the manufacturing industry on average will have reached its old peaks again.
Some industries ahead of the business cycle, such as the chemical industry, could reach this goal earlier though. This also implies that the insolvency risk remains elevated, at least in 2010."
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