German Industry: Little more than stagnation in 2016

Industrial output in Germany is likely to expand by around 0.5% in real terms in 2015. For 2016, expect growth close to zero. This means the sustained phase of relatively muted economic dynamics of industrial output seen since 2012 would continue. The rather stable development of producer prices in recent months also provides evidence that would indicate subdued industrial activity. The forecast for industrial output implies that manufacturing's share in total German gross value added will shrink for 2015 and 2016. 

German industry's low level of growth momentum is disappointing, as many underlying macroeconomic conditions are favourable at the moment. This refers to the low interest rates, the current valuation of the euro as well as low commodity prices. It is evident that the weak euro is supporting exports to the United States and the United Kingdom. However, one would expect these factors to have a greater effect on stimulating performance as a whole. 

At an industry level, many of the major German industrial sectors will not expand their production activities or will do so only marginally, at best according to current forecast. The automotive industry is expected to increase its output by 0.5% in 2016. On average, the metals industry (metal production and metal products) could also see a slight uptick. It is believed that mechanical engineering and electrical engineering are both poised for a round of stagnation. Domestic production in the chemicals industry could decline further in 2016.

Without sufficient investment in research and development activities, new products and production technologies, it is fundamentally more difficult to raise productivity levels and to be competitive at an international level. In many cases, this relates more to Germany as a business location than it does to German companies, as the latter are certainly stepping up investments in foreign countries where they are also increasingly establishing R&D facilities. For Germany in particular, which is a high-wage location, those investments in the domestic capital stock would prove necessary for helping to raise corporate productivity in the long term, to automate production processes further and enhance their flexibility, as well as to link those processes with suppliers and customers more closely.