Turning point in the manufacturing sector
German industry is in the midst of times of structural upheaval and faces a variety of challenges: High energy costs, inflation, a shortage of skilled workers, crippling digitalization, decarbonization and the global trend towards geo-economic fragmentation are some of the more prominent examples here. The associated transformation processes are accompanied by structural changes in the manufacturing sectors, which can be observed using the production indices. These measure the monthly output of the manufacturing sector and are thus a key indicator of Germany's economic development.
Figure 1 shows the development of the production indices for intermediate and capital goods and their long-term trend. It is striking that the development of the two curves correlates strongly at different levels up to 2020: If the production of intermediate goods increases, the production of capital goods also increases - with a slight time lag. This is consistent insofar as intermediate goods (raw materials, finished parts, semi-finished products, etc.) are needed to produce capital goods (e.g. machinery, technical equipment and vehicles). Thus, if more capital goods are demanded and produced during an economic upswing, more intermediate goods must first be produced for their production, ceteris paribus - vice versa in phases of economic downturn. For better comparability, figure 2 shows only the deviation of the indices from their long-term trend.
It is interesting to note that the close cyclical correlation between the production of intermediate and capital goods has dissolved and even reversed as of the beginning of 2021.
The reasons for this are unclear. One reason could be efficiency gains in the business cycle: If company A optimizes its production and therefore purchases fewer intermediate goods from company B, company B also demands fewer intermediate goods from company C under the same circumstances, and so on. In addition to these internal dynamics, external factors such as increased energy and commodity prices could also play a role. The shift of intermediate goods production abroad in response to these price increases could mean that these goods are now imported, which in turn affects the production indices.
Although the exact causes of these developments are currently unknown, it can be assumed that demand for new, more efficient capital goods will continue to rise as part of the ongoing transformation of German industry toward climate neutrality. However, the striking gap between the production indices for intermediate and capital goods points to a profound structural change taking place within German industry.
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