German industry is currently in an unusual position: the order books are as full as seldom before.
But production stalls because important preliminary products are missing.
This is slowing the upswing and is costing companies a double-digit billion amount in the current year, writes Ifo economic expert Prof. Timo Wollmershäuser in a guest article.
Munich - The German economy is increasingly recovering from the corona crisis.
In the summer half of the year, economic output in Germany increased strongly and was able to make up for a large part of the economic slump at the beginning of the year.
The contact-intensive service providers in particular contributed to the recovery.
You benefit from the gradual corona openings and the normalization of consumption options.
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Delivery bottlenecks dampen recovery
However, the economy in Germany is currently divided.
In the manufacturing sector, value added fell for the third quarter in a row.
Although incoming orders have risen almost continuously and the order books are as full as seldom before, delivery bottlenecks for important industrial intermediate products prevented an expansion of production.
According to estimates by the Ifo Institute, real added value amounted to almost 40 billion.
Lost euros.
That corresponds to a little more than one percent of the total economic output in Germany in one year.
The yardstick used was the value added that would have been expected in the previous development of incoming orders if the delivery bottlenecks had only increased to the extent that was usual in previous expansion phases.
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Gross value added in manufacturing
© ifo Institute
The currently more pronounced delivery bottlenecks are likely to be a direct consequence of the corona crisis.
Since the outbreak of the pandemic, there has been a worldwide shift in consumption away from services and towards goods and there to certain groups of goods, such as durable consumer goods, electronic items and special medical products.
This abrupt increase in demand has quickly pushed many manufacturers of the intermediate products necessary for the production of these goods to their limits.
In addition, the global supply chains are faced with enormous logistical challenges as a result of the major changes in the flow of goods and repeated closings of important trading ports.
The normalization of private consumption will continue to support the economy
In the coming months, private consumption will continue to be the mainstay of the recovery simply through the normalization of spending. The prerequisite for this is that the infection rate will remain under control and that therefore neither new state restrictions nor voluntary reluctance to consume can be expected. Once the remaining restrictions are completely lifted, nothing stands in the way of a full recovery in retail and high-contact service providers.
It is also unlikely that there will be noticeable catch-up effects because private households are at least partially using up their accumulated surplus savings, since a large part of the lost consumption relates to services that are difficult to catch up. This includes visits to the hairdresser and restaurants, but also visits to events in the areas of leisure, entertainment and culture. The pent-up demand in goods consumption, on the other hand, is likely to be rather low, since the combined purchases since the beginning of the corona crisis have not been lower than in the same period before when the German economy was booming. Expenditure on durable consumer goods such as furniture and household appliances also contributed to this,the lack of consumption by the contact-intensive service providers and also benefited from the lower VAT in the second half of 2020.
Strong recovery in industry in the coming year
In manufacturing, the decline in value added is likely to continue for the time being.
In the latest economic survey by the Ifo Institute, companies rated their order and business situation as above average.
At the same time, however, 70 percent of the participants in the ifo survey, and thus an almost unchanged high proportion, reported that delivery bottlenecks continue to hinder production.
At the moment it cannot be judged whether the high point has already been reached.
Nevertheless, it is assumed for the forecast that as the corona crisis subsides, the shifts in the structure of demand that can be observed around the world are likely to gradually reverse again and one of the causes of the delivery bottlenecks will therefore no longer exist.
A strong recovery in industry is then to be expected in the coming year. Just closing the gap between current production and production, which would have been expected without delivery bottlenecks, should go hand in hand with an increase in industrial added value of almost 6 percent. It is assumed that there will be neither an increase in the number of cancellations of existing orders nor a further increase in incoming orders because, among other things, strong price increases for industrial goods are dampening demand.
All in all, according to the current Ifo economic forecast, gross domestic product will increase by 2½ this year and by around 5 percent in the coming year.
This means that the forecast for this year has been cut by just under one percentage point compared to the summer and increased accordingly for the coming year.
The shift in economic dynamics from this year to the next is largely due to production difficulties in industry.
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High economic risks
There is uncertainty in connection with the assumed effects of the delivery bottlenecks.
On the one hand, they could worsen further or last longer.
The associated production losses would then be greater and there would be a risk that the economic recovery of the German economy would slow down further.
On the other hand, if the delivery bottlenecks actually ease, the recovery in the coming year could be much stronger.
This is because the forecast has so far only assumed that production will catch up to a level that corresponds to the order situation.
However, it does not take into account that orders that have not yet been processed are made up for.
The assumed course of the pandemic is also uncertain. Should there be renewed closings in the winter half-year, the expected recovery in retail and among the contact-intensive service providers is likely to be too optimistic and postpone into the coming year. However, private consumption could also recover faster than outlined in this forecast if the excess savings accumulated during the corona crisis are spent and thus affect demand.
Finally, there is also uncertainty with regard to the financial policy direction of the new federal government.
Various reforms of the tax and levy system as well as climate policy measures are being discussed, which could result in additional burdens and reliefs for private households and companies compared to the current situation assumed in the forecast.
About the author: Prof. Dr. Timo Wollmershäuser has been Head of Economic Research and Forecasts at the Ifo Institute * in Munich since 2014. In addition to the current economic development, he regularly comments on the ifo business climate index. It is considered the most important economic barometer in Germany.
* Merkur.de is part of IPPEN.MEDIA.