German and Dutch industry no longer in step

The Dutch and German economies are closely intertwined. Not only do we trade intensively with each other, but our economies are also influenced by many of the same factors. You have to admit, the first picture against this backdrop is quite intriguing. For years, industrial production in both countries has been perfectly in sync, and then suddenly it's not. Fortunately, we're on the right side. But what exactly happened?

It appears that the divergence in industrial production in the Netherlands and Germany began when, and because, car production in Germany collapsed. Dieselgate began earlier, but, as the following figure shows, car production in Germany nearly halved between August 2018 and April 2022. This was undoubtedly related to Dieselgate and its aftermath, but also to the other problems German car manufacturers subsequently faced, such as chip shortages during the pandemic and the backlog in electric cars. German car manufacturers also relocated some production to countries with lower labor costs.

Between April 2022 and August 2023, car production in Germany recovered by around 40%, after which it stabilized at a level about 30% lower than its peak. Looking back at the first chart, we see that the German production index lagged the Dutch index by approximately 22% between August 2018 and April 2022.

Admittedly, we also have an automotive industry, which consists primarily of suppliers for German car manufacturers, not to mention VDL, which built cars for years but no longer does. But here, the sector is much less dominant. Instead, we have, far more than Germany, companies in the chip industry.

The following graph is a copy of the first, but I've copied the shaded area from the second graph and "lifted" the German production index by 22 index points from May 2022 onwards. We can see that production in the Netherlands and Germany is quite in line again from May 2022 onwards, which is when German car production stabilizes.

All of this leads to an obvious conclusion. There's no doubt that the Dutch and German economies are intertwined, and that the industries in both countries generally move more or less in lockstep. But that's not the case if the German automotive industry takes a severe hit.

This naturally also has consequences for how both economies develop as a whole. To this end, I look at GDP in volume in the following figure. The graph shows that German GDP has grown little to nothing since 2017, while ours has grown by more than 10% over that period.

If you look closely at the chart, you'll see that GDP in both countries has been developing more or less in parallel since the third quarter of 2022, but that our GDP has been outpacing Germany's again in recent quarters. That's why I've zoomed in on the most recent development of industrial production in both countries in the following chart.

The graph suggests that Germany is experiencing a gradual decline in production over this period, while production in our country is stabilizing from April 2024 onward. Perhaps this difference is just noise, and in my enthusiasm I'm reading too much into the figures. hinein zu interpretieren. Time will tell.

But it's also clear that Germany has a relatively large energy-intensive industry, such as the chemical industry. Destatis, the German CBS, has been reporting separate figures on production in the five most energy-intensive sectors for some time now. Due to the explosion in European gas prices in 2021 and especially 2022, production in these sectors fell sharply. Since then, the European gas price has fallen considerably and is currently relatively stable. Even before the Russian invasion of Ukraine, the European gas price was higher than, for example, the US price, but despite the decline in the European gas price since 2022, it is still much higher than the US price. Regardless, the German energy-intensive industry has not recovered from the lost production.

Closing
The German economy has been stagnating for years. This is mainly due to a series of problems in industry. We have managed to escape this stagnation. The Merz government, which took office earlier this year, is trying to address the problems. So far, it hasn't seemed very decisive. We will continue to monitor the situation.

Hans de Jong

Han de Jong is a former chief economist at ABN Amro and now a resident economist at BNR Nieuwsradio, among others. His comments can also be found on Crystalcleareconomics.nl

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.