Germany's industrial sector slipped back into decline in September, with output retreating by 2.7% month-on-month, Oxford Economics reports on November 7.

“This larger-than-expected fall erased most of the gains registered in August and reflects a renewed bout of weakness for the country's manufacturing base,” Oxford Economics said in a note. "Today's poor reading shows that the industrial turnaround is not there yet, as demand remains soft and structural challenges acute, posing a downside risk to our forecast of a very gradual rebound in industrial output by year-end."

The boomerang effect of sanctions on Europe is pushing the Continent into recession due the effects of the polycrisis, while Russia’s economy is flourishing for now. The European slowdown is due to Europe has lost its competitive edge, according to a recent report by former Italian Prime Minister Mario Draghi.

The latest data paints a sobering picture for Germany's industry, suggesting that optimism surrounding an industrial recovery may have been premature.

Industrial production excluding construction declined by 2.7% month-on-month in September, following a rise of 3.2% in August. The August gains had offered a glimmer of hope, though analysts cautioned that it did not necessarily indicate a broader recovery. The sharp downturn in September has proven those warnings well-founded, with the decline steeper than consensus expectations.

The fall in industrial output was broad-based, affecting all major sectors and categories of goods. Automotive output, which has shown particular volatility in recent months, was a key driver of the downturn and comes on top of Volkswagen’s recent announcement that it will close three German plants for the first time in its 87-year history. The automotive sector, which contributed strongly to August's growth, registered a significant fall of 7% in September.

Additionally, energy-intensive industries saw their production decrease for the third consecutive month, with output now falling below levels recorded at the beginning of the year. Capital goods were the hardest hit, with a 4% decline, but production of intermediate and consumer goods also fell amid the wider industrial slump.

The weak industrial performance in September and similarly lacklustre survey data suggest that Germany's industrial sector is unlikely to escape its current malaise in the short term.

"September's even lower-than-expected outturn and recent weak surveys suggest that a clear end to Germany's industrial malaise is not in sight in the short term," Oxford Economics noted, highlighting the challenges the sector continues to face. This presents a downside risk to forecasts of a gradual industrial recovery by the end of the year and raises the likelihood that any significant rebound may be delayed further, the analysts said.

Despite the beginnings of a monetary policy easing cycle, the impact on the real economy appears limited so far. Interest rates, while beginning to moderate, remain elevated, thereby constraining demand for capital goods and consumer durables. Additionally, uncertain demand prospects have delayed the expected turnaround in the inventory cycle, further weighing on prospects for industrial recovery. The current environment of high borrowing costs and cautious business sentiment continues to pose headwinds for German manufacturers, who must also contend with structural challenges and a subdued global economic outlook.

The September figures suggest that Germany's industrial base, often considered the engine of the broader European economy, continues to struggle. The latest data adds to growing concerns over the strength and resilience of both Germany’s, and Europe in general, industrial outlook, as ongoing demand-side weakness, high energy prices, and supply chain constraints combine to depress economic activity.