How worried should we be about the slowdown in German manufacturing?
New emissions standards for cars have resulted in weaker production in an important part of the German economy.
German industrial production contracted by 1.2% in Q3 and is behind the general slowdown being seen in eurozone manufacturing. What is causing the decline and how concerned should investors be?
Taking a closer look at the breakdown of Germany’s production data reveals that most of the economy’s manufacturing sub-sectors are performing well. The exception to this has been the autos sector where commercial and passenger vehicle production has been weak. There are other signs that all is not well in the sector: new car registration fell by 30.5% year-on-year in September according to the German Motor Vehicle Authority.
New emissions standards
We can attribute most of the decline in the sector to the introduction of the new worldwide harmonised light-duty vehicles test procedure (WLTP).
This is a new test that was implemented in 2017 to measure the fuel consumption and carbon emissions of passenger vehicles. It was brought in after several manufacturers were found to have been cheating on emissions tests to show lower emissions than was the case in a real world environment.
These new tougher standards were introduced for all new models from 1 September 2017, but also applied to all newly-registered vehicles from 1 September 2018. In anticipation of this, retailers heavily discounted non-compliant models to clear stock before the deadline, causing a surge in new registrations in August, but then came the inevitable collapse in September mentioned above.
The WLTP has affected all of Europe, and so Germany is not alone. However, German car production is one of the largest sub-sectors in the German economy. The large size of the sector means the WLTP issue has had a disproportionately higher impact on German industrial production and GDP than in most other countries.
A fleeting effect?
Given that the fall in car registrations and output should prove temporary, and that the rest of the German economy remains robust, we don’t think there’s cause for investor concern.
The manufacturing sector is likely to recover as car producers adjust to the procedures and investors can take heart that the sector’s slump was mentioned as an “isolated” factor by European Central Bank President Mario Draghi at his latest press conference on 25 October.
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