The recent weakness in industrial production – especially in Germany – is at odds with other indicators (economic sentiment index, perceived demand, …).
Those latter indicators, while having levelled off, point to growth still holding up in the euro area. In this case, why has industrial production been so weak recently? Trade war is one reason often given. However, for the time being, at least, new tariffs are limited to steel and aluminium exports to the US, which account for less than 0.1 % of euro-area GDP.
Another explanation is related to the new emission-testing procedures and standards in the car industry. Before the VW-Diesel scandal in 2015, the NEDC (New European Driving Cycle) was the test procedure for measuring new-car pollution limits. Due to the scandal, the procedure has been revised to a more severe version: the WLTP (Worldwide harmonized Light vehicles Test Procedure), which came into force on 1 September, 2017 for new models and on 1 September 2018 for all new car registrations.
Comments from car-company CEOs suggest that, as many existing models were not immediately ready for the new standards, production would have to be temporarily delayed. Some models, especially those equipped with a diesel engine, could not be ordered for a couple of months, an effect clearly visible in the graph below. In Germany, the Manufacturing Orders for Motor Vehicles plunged by almost 13% in just two months. The good news is that production disruptions should prove temporary and car production should gradually return to normal.