Recession risk rises in Germany as factory output drops

Output in Germany’s crucial manufacturing sector unexpectedly contracted in October, reinforcing concerns that Europe’s largest economy remains entrenched in stagnation.
Figures from Destatis, the German statistics office, published on Friday showed that industrial production in Germany slid by 1 per cent over the month to October and 4.5 per cent on an annual basis. Analysts had expected output to grow by 1.2 per cent in the month.
Car production fell by 1.9 per cent, while energy supply contracted by 8.9 per cent over the month, driving overall output in the industrial sector lower.
Carsten Brzeski, global head of macro at ING, the Dutch bank, said: “The slump continues … This is a very weak start to the fourth quarter, increasing the risk of a winter recession in Germany.”
A combination of higher energy prices after Russia’s invasion of Ukraine in 2022, restrictive monetary policy and greater competition from abroad in some of Germany’s key exporting sectors have constrained growth.
German car markers have struggled to remain financially viable amid mounting competition from Chinese suppliers, which have eaten into their market share. China has substantially raised its production of electric vehicles and has captured the demand of consumers by offering vehicles at a lower price compared to European suppliers.
Economists have also said that Donald Trump’s possible imposition of higher tariffs on US imports, once he takes office, could affect Germany materially given the country’s heavy reliance on trade to fuel its economy.
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Analysts at Citibank, the US investment bank, said: “Falling borrowing costs and the rotation of demand from services back to goods as the post-pandemic patterns normalise should be supportive to manufacturing and we still see an uptrend in German manufacturing confidence despite recent setbacks.”
“But given likely disruptions from US trade policy under President Donald Trump next year, we remain cautious on the outlook.”
According to forecasts released by the Organisation for Economic Cooperation and Development this month, the German economy is expected to grow by 0.7 per cent next year, down from its prior projection of 1.1 per cent, before stagnating this year.
The European Central Bank is poised to lower eurozone interest rates next week to 3 per cent having lowered them three times already this year.
The pound will hit a post-Brexit high of $1.38 against the dollar next year on the back of higher economic growth and still high interest rates, a leading investment bank has said (Mehreen Khan writes).
Bank of America, which has long had a bearish outlook on the pound and UK assets, said sterling would now be one of the best performing major currencies in the world in 2025, gaining up to 5 per cent against the dollar to hit $1.38 — the highest level since the Brexit vote. The pound is trading at $1.28 against the US currency and slumped to a record low of just over $1.10 after the mini-budget in 2022.
Two years ago, analysts at the US investment bank warned the pound was suffering an “existential crisis” that was more reminiscent of an emerging market currency, due to high inflation and political uncertainty. But Athanasios Vamvakidis, a foreign exchange strategist, said sterling would rise against the euro next year as UK growth would outpace the eurozone. The value of the pound will also be supported by four interest rate cuts from the Bank of England next year, compared to at least six in the eurozone. Higher interest rates mean investors can borrowing in a cheaper currency and invest in another where returns are more lucrative.