Bottlenecks crimp German recovery despite record-high order book levels

Author: Morgan Condon

2021/09/22

LONDON (ICIS)--Bottlenecks in supply chains are hampering recovery in the German manufacturing sector, according to the latest research from economists at the Ifo Institute on Wednesday.

Manufacturing output contracted by 1.3% in the second quarter of 2021, following a 0.8% decrease at the beginning of the year, despite record high levels in order books and almost continuous growth of new orders.

Growth in the services sector offset this slump, as customer-facing industries made a strong recovery in the summer on the back of easing lockdown restrictions, driving the 1.6% rise in output.

The Ifo Institute also attribute the surge in demand across the manufacturing sector to the pandemic, as services were prevented from operating to stem rising infection rates.

In line with this, producers had to run at capacity limits to keep up with the sudden increase in buying appetite, with Ifo citing intermediate products as particularly affected by this change in fundamentals.

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The trend of ebbing manufacturing output has continued into the third quarter and is expected to endure throughout the rest of the year, as supply of raw materials and intermediate products has recently tightened.

In August, 70% of the Ifo Business Survey respondents confirmed that production was facing constriction due to problems with supply, and it is not clear whether bottlenecks have yet peaked.

Researchers at the Ifo Institute anticipate that supply constraints “will become less significant by the end of the year” due shifts in structural demand as the world emerges from the worst impact of the coronavirus crisis.

“A strong recovery in manufacturing can then be expected in the coming year, as existing orders will have to be processed – provided there is no increase in cancellations,” said the Ifo Institute.

“However, the continued robust economic situation in the key sales markets for the German export industry will also contribute to this.”

The Ifo’s forecast is predicated on increased vaccination uptake eroding infection rates in the country, as well as logistics pressures easing off by the end of the year.

“If, contrary to the assumption made here, there is another lockdown in the fall, the projected recovery in trade and contact-intensive services in the second half of 2021 is likely to be too optimistic and will be delayed into 2022,” said Ifo.

As a result of these forecasts, German GDP is expected to rise by 2.5% this year, increasing to 5.1% for 2022 in response to the low level of production of goods and services in 2021, with normal expansion to resume in 2023.

Inflation is tipped to rise further to around 4.5% by the end of the year, only gradually falling to near 2% in the coming year as things start to level out as consumption patterns normalise and energy prices remain largely unchanged.

“A pass-through of rising prices for raw materials and intermediate products from producer prices to consumer prices was not assumed, as the material shortages underlying the cost increases will ease in the coming months,” said the Ifo Institute.

This means inflation should average 3.0% for 2021, following an average rate of 0,5% in 2020, rising over the following two years at 2.3% and 1.6% respectively.

Another factor which will shape economic recovery is the results of the German federal elections, due to be held on 26 September.

Depending on what reforms to the tax and contribution system are pushed forwards, coupled with climate policy measures, this could present further benefits and challenges to both households and industrial producers alike.

Front page picture: Large container ship Ever Ace in the Port of Hamburg, Germany, earlier in September 
Source: Action Press/Shutterstock