International and Monetary Economics Network

Time and again in Germany, charts are shown depicting the decline in industrial production (such as in Figure 1). These are then accompanied by remarks like „Germany in free fall.“

Industrial production in Germany has indeed declined quite significantly. This is naturally not a cause for celebration. However, the situation of industry is still not as dire as portrayed in these charts. This is because industrial value added – that is, what actually generates value and leads to income – has remained roughly constant in Germany in recent years. This is not a dynamic development, but it is still considerably better than „free fall“ (Figure 2; slight differences may occur compared to presentations by media or research institutes, depending on data sources and the status of data revisions).

What are possible reasons for this divergence between production and value added? The most important reason is likely a kind of industrial structural transformation. Services related to industrial products are increasing. Classic examples include elevator manufacturer, which has long generated a significant portion of its revenue from services – such as simple repairs – after an elevator has been installed. More recently, goods like cars or machines are increasingly merging with software, leading to hybrid products. Research and development activities also contribute to maintaining high value added in Germany. Manufacturing itself is declining or being outsourced to other countries, while innovative activities remain in the country.

It is therefore difficult to speak of deindustrialization in Germany. It is true in the sense that production itself is declining. However, if Germany’s industry wants to remain leading, it must participate in structural transformation in order to generate high value added and high incomes. The recent development with the divergence between industrial production and value added is, therefore, fundamentally a positive sign.

In most advanced economies, a similar trend can be observed as in Germany. Based on available data, industrial value added usually developed better than production, including in Switzerland (Figures 3-5). Austria is one of the countries where this pattern has hardly been evident in recent years – at least based on available data. The development is particularly clear in the United States. The narrative of deindustrialization in the US must therefore also be questioned from this perspective.

The same pattern can also be observed for countries like Sweden and Denmark, where the difference between value added and production is particularly pronounced. This again illustrates the pattern that seems to characterize industry in modern economies.

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Figure 2

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Figure 5