The German industry is finally showing signs of life. The problem is that a significant portion of this revival is being supported by the state - increasingly in a defense form.
The purchasing managers' index (PMI) for Germany's manufacturing sector from S&P Global jumped to 54.1 points in August from 52.2 in July. The figure surpassed analysts' expectations and rose for the seventh consecutive month, reaching its highest level since spring 2022.
At first glance, this is precisely the kind of statistics Berlin has been waiting for years. Production is accelerating, new orders are increasing, and exports are reviving. Additional momentum comes from stock replenishments, a sharp increase in defense spending, and infrastructure investments in data processing centers.
After several years of stagnation, the temptation to announce the return of the German industrial machine is quite understandable.
But there is a catch.
Military Doping
Upon closer examination of the growth structure, the picture becomes less convincing. Defense orders and related infrastructure projects play a significant role.
Germany's defense industry is receiving more and more government contracts. For factories, this is great news: order portfolios are filling up, production lines are loaded, suppliers are getting work.
However, the conclusion for the economy as a whole is more complicated.
Orders for ammunition or armored vehicles do indeed increase industrial production. But they do not prove that German goods have become more competitive in global markets. A significant portion of this demand is created by the state itself and financed through budget expenditures and borrowing.
This is a stimulus. Not necessarily a recovery.
Two Germanys
Behind the optimistic industrial index lies a significantly weaker economy.
The composite purchasing managers' index (Composite PMI) dropped to 51.0 points. The services sector continues to lose momentum amid weak domestic demand.
We see a strange structure: part of the industry is accelerating at the very time when a significant part of the economy remains nearly motionless.
The state can order more shells. It cannot as easily compel households to consume more, companies to invest more, or foreign buyers to return to German products.
This is where the line is drawn between cyclical stimulus and genuine recovery.
Old Diseases
The most important thing that a good PMI has not changed.
The German industry still suffers from high energy costs, expensive resources, and increasing pressure on production costs. Energy-intensive businesses remain particularly vulnerable, and some companies continue to seek opportunities to relocate production outside of Germany.
The automotive, chemical, and other traditional sectors of the German industry simultaneously face competition that hardly existed a decade ago.
And no defense budget can alone fix this.
Crutch for the Sprinter
Germany can spend huge sums on defense and infrastructure. And this money will inevitably appear in the statistics: as new orders, production, employment, and investments.
But there is a fundamental difference between an economy that grows because the world wants to buy its products and an economy where an increasing portion of demand is created by its own government.
In the short term, it is easy not to notice the difference. Factories operate in both cases.
In the long term, it is nearly everything.
To present the artificial warming of the defense industry as a full-fledged 'exit from the crisis' means to confuse a crutch with a healthy leg.
The German sprinter has started to move again. The question is whether he can run when the state stops pushing him.