German Recovery Hopes Stick as Industry Momentum Catches Up

Hopes for a speedy economic rebound in Germany are holding ground as manufacturing starts to catch up with consumer-oriented sectors.

Industrial output gained 8.9% in June, slightly more than forecast, following on from figures on Thursday that showed factory demand is rising. The most recent data suggest Europe’s largest economy may bounce back more quickly than its neighbors, after a record second-quarter slump because of pandemic-related restrictions on business and movement.

With trade indicators also signaling a revival, traditionally influential parts of the German economy are now seeing improvements that so far have been concentrated mainly in private consumption.

A full recovery will take time. Manufacturing and trade were under pressure well before the global Covid-19 outbreak. Trade tensions between the U.S. and China — two of Germany’s major export markets — could stretch past the pandemic, with squabbles increasing more recently over issues including human rights and technology companies.

“Having been led initially by domestic consumer spending on goods, the recovery is gradually broadening out to early stages of production and from domestic to foreign demand,” said Holger Schmieding, chief economist at Berenberg. “In the absence of a major accident, Germany can recoup at least half the second-quarter drop in GDP in the third quarter already.”

An industrial recovery is also underway in other euro-area countries. France reported a 12.7% increase in output in June, production in Spain was up 14.0% from the previous month.

German factory demand in June was at roughly 90% of the levels seen at the end of last year. Output was strongest for investment goods, with car and car-part makers seeing production up more than 50%.

The Bundesbank has said the German economy probably bottomed out in April, though it noted that the recovery in manufacturing and exports has been moderate and the business situation is still considered “very bad.”

Unemployment rose by more than 670,000 in the second quarter, and some 5.6 million people remained on state wage support last month.

Deutsche Lufthansa (DE:LHAG) AG (OTC:DLAKY), which set out to slash headcount by about 22,000 without forced redundancies, warned Thursday that compulsory dismissals are now likely. Europe’s biggest airline posted an adjusted operating loss of 1.7 billion euros ($2 billion) in the second quarter, after the coronavirus grounded virtually all passenger flights.

The European Commission predicts the German economy will contract 6.3% this year and expand 5.3% in 2021. The euro area is set to see a deeper slump, though better-than-expected data recently have fueled hope for an upside surprise.

European Central Bank Chief Economist Philip Lane has cautioned against any premature optimism, arguing that the region’s third-quarter performance will be key to determining the strength and sustainability of the recovery.