Declining Car Sales Help Drive Germany Toward Recession

As German cars go, so may go the German — and maybe much of Europe’s — economy. And the signs from the vaunted German automobile industry aren’t good.

Production of cars, the largest export product in a German manufacturing sector dependent on exports, has fallen by about 16% over the past year. 

In the first half of 2019, German auto production is down 12% year-over-year. 

Export-Centered Industry

German carmakers are at the whim of everyone else’s economy, with nearly eight in 10 German cars being destined for export.

Much of the blame for the industry’s sluggishness has been placed on slowing demand in China, though attention is also shifting to other contracting markets.

Germany’s auto industry association, VDA, said last month the Chinese market declined 4% to 1.5 million passenger cars in July and since January has contracted by 13%.

“Sales of passenger cars have displayed a negative trend on the largest single market for 13 months now,” the association said in an August press release.

German carmakers Volkswagen AG VWAGY, Daimler AG DMLRY and Bayerische Moto BMWYY all derive about a third of their revenue from China sales.

While not as important as China, German automakers have also seen bad news from India, where sales of passenger cars are down 13% year-to-date.

And while car sales have been up a bit in the United States and mostly flat in much of Western Europe, the European news this past month wasn’t good.

New car registrations plunged 14% last month in France and were off a whopping 31% in Spain.

The news out of Spain was particularly bad for German companies: Volkswagen saw sales drop 18% there in June, and Audi AG AUDVF reported deliveries that were off by 35%.

Diesel Drop-Off

German cars, including many Volkswagens and Mercedes, are noted for their continued use of diesel engines.

The move away from diesels — and away from internal combustion engines generally and toward electric cars — hasn’t helped German carmakers.

German economy is strongly depending on passenger car production. The signs are not good for #BMW or #Daimler, as they have almost totally missed electric cars (BEV) and focused on ICE and PHEV. August production figures should be out soon @VDA_online. pic.twitter.com/0RsQxpVdUc

— Mika Keski-Heikkilä (@mkeskihe) September 2, 2019

The decline in the industry is psychically tough for Germans, who take pride in their famous car brands. But the bigger problem is the outsized role the industry plays in the nation’s economy.

While its 3.1% unemployment rate remains near post-German reunification lows and the lowest in Europe, Deutsche Bank said in mid-August the country’s economy may already be in a technical recession.

Germany's central bank, the Bundesbank, has warned the next quarterly GDP report could tip the country unquestionably into recession.

And what’s bad for Germany is bad for Europe, as the automotive downturn starts to ripple through the continent’s economy, with suppliers from Poland to Portugal that are dependent on German customers.

Related domestic industries are also affected. Moody’s last month downgraded steel maker ThyssenKrupp AG TKAMY debt to junk, partly blaming autos,

German chemical company BASF SE BASFY made a big mid-year cut to its profits forecast, blaming slowing car sales, and Continental AG CTTAY, Germany’s largest auto technology supply company, cut its 2019 guidance and production forecast, saying it expects global car production to be down 4% percent, worse than the 1% decline it had projected earlier this year.

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Photo via Wikimedia.