German industrial production experienced a steeper decline than originally anticipated in the month of June, according to data released on Monday. This data underscores the challenges confronting the manufacturing sector amid a downturn in the largest economy of Europe. In June, industrial production saw a decrease of 1.5% when compared to May’s figures. This decline was primarily driven by a significant 3.5% contraction in Germany’s automotive industry. This scenario raises the concern of a potential retraction within the manufacturing powerhouse later in the year, with the looming possibility of slipping back into a recessionary state. The observed dip in industrial output is poised to emerge as one of the contributing factors responsible for triggering a renewed contraction in Germany’s Gross Domestic Product (GDP) during the second half of 2023.

Furthermore, the construction sector, which experienced a notable contraction of 2.8% in output, also exerted an adverse influence on the overall industrial production, as indicated by the country’s official statistics office on Monday. The German manufacturing sector has encountered challenging times thus far in the year, grappling with diminishing orders, sluggish output, and elevated price levels. This is clearly exemplified by the final Purchasing Managers’ Index (PMI) for manufacturing provided by HCOB, which has experienced a decline for the sixth consecutive month, culminating in July.

The recent emergence from a recession during the April-to-June period, marked by a stagnant Gross Domestic Product (GDP) in comparison to the previous quarter, seems to be accompanied by tenuous prospects. The current provisional data suggests that the modest improvement in the economic outlook may not be sustainable over time. The German automotive sector, constituting roughly 5% of the national economy, continues to grapple with the aftermath of the pandemic-induced setback and persistent disruptions in supply chains.

Despite a noteworthy increase in car production, with approximately 2.2 million units manufactured in the first half of the year as reported by the German Automotive Industry Association, the output remains 10% lower than the corresponding period in 2019. A return to the pre-pandemic production levels appears to be an endeavour requiring additional time.

In other segments within Germany’s industrial sector, encompassing energy production among others, exhibit a more optimistic outlook. New manufacturing orders demonstrated a substantial surge of 7% in June, in comparison to the previous month, according to preliminary data released last Friday. However, these figures were influenced by large-scale orders, thereby potentially distorting the overall interpretation.

Source: TradingView

Turning attention to the stock market, the German benchmark index extended losses from last week, but overall price action remained trapped within the boundaries of the 15,456 – 16,528 trading range. Despite the large bearish divergence, which shows that the rally is running out of steam, as long as the index remains within its current range the up trend from the October 2022 low remains intact.

Given the recent loss of momentum the price action is likely to remain choppy in the near-term. Ultimately, a subsequent breakout from the current trading range would determine the direction of the next leg.

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