San Francisco Frontiers - Germany factory output falls to lowest since pandemic in 2020

Factory output fell 1.9 percent month-on-month, federal statistics agency Destatis said, steeper than a drop of 0.5 percent forecast by analysts polled by financial data firm FactSet.

There were particularly heavy falls in the machinery and pharmaceutical sectors, helping to drag overall output down to levels last seen in May 2020 during the coronavirus pandemic.

Destatis also made a major revision to May industrial production data, saying the indicator fell 0.1 percent. It had previously reported a healthy rise of 1.2 percent.

ING bank analyst Carsten Brzeski said the dire data could prompt a downward revision to an already poor initial estimate showing that the economy shrank slightly in the second quarter.

"This is bad news," he said. "At face value, industry remains stuck in a very long bottoming out."

- Political setback -

Fixing the eurozone's traditional export powerhouse has been a key priority for Germany's conservative Chancellor Friedrich Merz, with the economy battered in recent years by high energy costs and fierce Chinese competition.

Plans to spend hundreds of billions of euros on infrastructure upgrades and rearmament -- combined with a series of brighter data releases since the start of the year -- had raised hopes that the worst might be over for Europe's export champion.

German business morale rose to its highest level in July after seven straight increases, while think tanks including the respected DIW institute have revised growth forecasts up for 2025 and 2026.

But hard data on business activity has been mixed, raising fears that the improved mood was down to unfounded optimism.

Some experts say better data early in the year was the temporary effect of US "front-loading" as American customers rushed to get orders in before Trump's tariffs took effect.

"Optimism still seems to be based on a big portion of wishful thinking and is not at all matched by current data," Brzeski said.

"For now, what looked like a cyclical rebound in the making has only been US front-loading."

Pointing to increased investment and an uptick in retail sales, however, Berenberg analyst Holger Schmieding said there were signs of green shoots for the German economy.

"The situation at home seems to be stabilising," he said. "German consumers are opening their wallets at least cautiously."

- Tariff troubles -

A new baseline US levy of 15 percent on EU exports took effect Thursday, up from 10 percent in effect since April, stiffening the tariff faced by Germany's exporters even while leaving many of them mired in uncertainty.

Export data released Thursday showed that German exports in June to the United States -- the country's biggest trading partner -- fell 2.1 percent, even as they rose 0.8 percent worldwide.

And data released Wednesday showed that industrial orders -- closely watched as an indicator of future business activity -- fell 1.0 percent month-on-month in June, after dropping 0.8 percent in May.

The United States is also carrying out investigations into sectors including pharmaceuticals and semiconductor equipment, heightening worries about worse to come.

"The tariffs are a big burden for German companies," the head of the German chambers of commerce, Helena Melnikov, told AFP. "Don't forget that tariffs were usually between zero and about two percent at the most beforehand."

"It could even come out worse for a variety of sectors because negotiations are ongoing," she added. "It is a real setback and makes it harder to do business in Germany."

A.Clark--SFF