Industrial production increased in February, adding to the positive macroeconomic data of the first two months of the year. This will be the last positive macro news for a while. The war in Ukraine radically changed German growth prospects.
Industrial production rose 0.2% month-on-month in February, from 1.4% in January, sending the latest signal of what the German economy might have looked like if the war in Ukraine had not taken place . Over the year, industrial production increased by 3.2%. Yet industrial production is nearly 4% below its pre-pandemic level.
The impact of the war in Ukraine is not yet visible in hard data
With today’s industrial production data, we have the full batch of the first two months of the year for the German economy. The picture these data paint is still one of an economy that is on the verge of picking up speed. Retail sales stagnated but did not fall under high energy prices; net exports increased and industrial production increased significantly compared to the fourth quarter of 2021. Based on these developments in the first two months of the year, the German economy was on track for slightly positive growth in the first quarter and a significant rebound thereafter. Well, that was all before the war.
The war in Ukraine not only radically changed the world, but also the outlook for the German economy. Energy and commodity prices higher than at the start of the year and likely for a long time to come, with new supply chain disruptions adding to old ones with a high risk that these will be permanently disrupted , and heightened uncertainty and fear will weigh on both supply and demand in the months ahead. Households’ real disposable incomes will suffer and businesses will find it increasingly difficult to meet the costs of rising energy and commodity prices, putting pressure on corporate profit margins. The first weak indicators signal a sharp drop in production expectations and a rise in uncertainty.
The whole economic model is in danger
Worse still, with high energy and commodity prices for an extended period, even energy supply disruptions, accelerating de-globalization and a possible new Cold War, a heavily export-oriented economy energy, then of course imports will suffer. Government support programs will mitigate the negative impact of war but cannot avoid stagflation.
The risk of recession remains
Even with a sharp fall in economic activity in March, a contraction in the first quarter is not yet done. Beyond the first quarter, however, the picture is not rosy for the German economy. For the full year, we recently revised our growth forecast down to 1.4%, which would delay the economy’s return to pre-pandemic levels until the end of this year. .
Read the original analysis: Latest industrial data shows what Germany’s economy could have looked like