(Sept 7): German industrial production declined the most in almost a year, marking an unexpected setback to the recovery of Europe’s biggest economy.

Output fell 1.1% in July, Destatis said on Monday, compared with a 0.2% gain predicted by economists in a Bloomberg survey. The numbers for June, which initially showed a small increase, were revised to zero.

The drop was mainly due to reduced production in the automotive industry, with the statistics office citing a multi-week production shutdown in that sector.

Still, the less volatile three-month average was 0.4% higher than in the previous period.

The report illustrates the bumpy road Germany must navigate as it tries to overcome years of malaise. After a recent spell of positive data, however, Bundesbank president Joachim Nagel said last week that the economy could expand by 1% this year, twice the pace projected only three months ago.

Supported by efforts to repair public infrastructure, rebuild the military and invest in the country’s digital future, growth proved surprisingly strong in the second quarter and is set to accelerate.

A third consecutive gain in factory orders in July will bolster momentum in the near term. While manufacturers of ships, trains, and aeroplanes in particular benefited from rising demand, the car industry kept struggling.

Volkswagen’s latest efforts to respond to declining sales in China, high costs and underused factories illustrate just how much. The supervisory board last week backed a sweeping restructuring that includes an extra 50,000 job cuts — about half in Germany.

“Although production in the manufacturing sector remained relatively robust in the second quarter despite rising energy prices, the consequences of the ongoing conflict in the Middle East now appear to be taking an increasingly heavy toll,” the Economy Ministry said Monday. “Overall, the prospects for a broader revival of industrial activity over the remainder of the year therefore remain subdued.”

Joerg Kraemer, chief economist at Commerzbank, also highlighted that excluding the one-off factor in the car sector, industrial production continues to move sideways at a low level.

“There will be no strong economic recovery as long as the federal government doesn’t improve the country’s battered business environment and corporate investment doesn’t pick up,” he said.

Such challenges have propelled voter support for far-right politicians. In Saxony-Anhalt in Germany’s east, the Alternative for Germany party easily defeated Chancellor Friedrich Merz’s Christian Democrats over the weekend.

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