The German economy ramped up its production in July despite persistent bottlenecks in important intermediate products such as semiconductors and building materials.

Industry, construction and energy suppliers together produced 1.0 percent more than in the previous month, as the Federal Ministry of Economics announced on Tuesday.

That was the first increase after three declines in a row and only the second monthly increase this year.

Nevertheless, production is still 5.5 percent lower than in February 2020, the month before the restrictions due to the corona pandemic in Germany began.

In terms of construction, there was growth of 1.1 percent this time, while energy production fell by 3.2 percent compared to the previous month. Industrial production alone increased by 1.3 percent. "Even if the supply bottlenecks for semiconductors, which recently slowed production, are likely to persist for a while, the figures suggest that the low point may now be over," wrote the ministry. According to economists, it should continue to stutter. “It would certainly be premature to take this as a sign of a change in trend,” said Commerzbank economist Ralph Solveen about the good start into the second half of the year. Figures already available from the Automobile Association showed that production in this important sector probably fell significantly again in August. “The shortage of preliminary products continues to have a negative impact,” said Solveen.

The ongoing shortage of chips is also a big topic at the IAA auto show, which is currently running in Munich: Car manufacturers and suppliers expect their production to be impaired for even longer by missing components.

Daimler boss Ola Källenius does not see any relaxation in chips until 2023 because demand is increasing sharply in several industries and production is not meeting.

Production expectations are increasing

The industry currently has full order books. There was even a record number of incoming orders in July. In many cases, however, the orders cannot be processed quickly due to acute bottlenecks in preliminary products. Steel and timber are also in short supply, and prices are rising accordingly. 70 percent of industrial companies currently state that they are experiencing bottlenecks, as the Ifo Institute found out in its company survey.

However, the industry assumes that it will produce more again in the future. The barometer for production expectations climbed by four to 27 points in August, as the Ifo Institute determined. This is a very high value in a long-term comparison. "Apparently the companies are hoping that the supply bottlenecks for preliminary products will slowly resolve in the coming months," said Ifo expert Klaus Wohlrabe. Expectations in the automotive, chemical and mechanical engineering industries have increased noticeably.

However, some institutes and banks want to lower their growth forecasts for the German economy this year.

The Institute for Macroeconomics and Business Cycle Research (IMK), for example, announced that it would “noticeably” correct its forecast of 4.5 percent downwards.

"On the other hand, this improves the growth prospects for 2022, because the industry should then process the orders with delivery problems resolving," said the scientific director of the IMK, Sebastian Dullien.

Significant decline in earnings expectations

The economic expectations of German financial experts have meanwhile clouded over again in September. The mood barometer of the Mannheim research institute ZEW fell compared to the previous month by 13.9 points to 26.5 points, as the Center for European Economic Research (ZEW) announced on Tuesday. Experts had expected a drop to 30.3 points. As recently as May, the indicator had reached its highest level in a good two decades. Since then, the indicator has fallen four times in a row. The delivery bottleneck also plays a role here: "The shortage of chips in vehicle construction and the scarcity of resources in the construction industry have led to a significant decline in earnings expectations in these industries," explained ZEW President Achim Wambach. "This is likely to have had a negative impact on economic expectations."

In contrast, the assessment of the current situation improved slightly in September. The indicator rose by 2.6 points to 31.9 points. The experts questioned assumed that the economic situation would improve. However, the expected extent and the dynamics have since been reduced considerably, explained Wambach.