Manufacturing Dampens Economic Activity in Germany – Temporarily Higher Inflation
The German economy saw only slow recovery in the second quarter of 2021, with a decline in manufacturing’s economic performance in particular putting on the brakes. “True, companies’ order books are full to bursting,” explains Timo Wollmershäuser, Head of Economic Forecasts, “but bottlenecks in key intermediate products prevented production from expanding.” In contrast, trade and many service providers benefited from falling infection rates, rapid vaccination progress, and the accompanying easing of restrictions in early summer. Accordingly, their sales saw a strong increase compared to the beginning of the year.
Recovery will remain weak in the third quarter and production is expected to shrink further, especially in manufacturing. This is indicated by the declining business expectations of companies as reported in the ifo Business Surveys of recent months. The reason for this is a noticeable worsening of supply bottlenecks. In July, for example, almost two-thirds of industrial companies said their production was impeded by a shortage of intermediate products – up from just 45 percent in April. Prospects for service providers and companies in trade have also clouded over. A new rise in infection rates and a stalling vaccination campaign are increasingly worrying owners of businesses that depend on social contact.
The rise in consumer prices is expected to accelerate further in the coming months to over 4 percent. This trend is being driven by increasing energy prices and the return to the normal VAT rate. At the beginning of next year, however, the inflation rate will gradually fall back toward 2 percent. “In this respect, there is currently no reason for the European Central Bank to tighten the monetary reins,” Wollmershäuser says.
