![](https://www.cityam.com/wp-content/uploads/2019/05/Schroders-5907888cc8057-5b76aca6b2292-1.png?w=50)
How worried should we be about the slowdown in German manufacturing?
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?
Kaputte Autos
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.
Important information
This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.
The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.
Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.
Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.