Bundesbank expects chip bottlenecks in German industry to worsen in Q2

The chip supply bottlenecks in German industry will likely worsen in the second quarter and lead to an overall weaker recovery of Europe’s largest economy this year, the Bundesbank’s chief economist said on Friday.

Shortages of semiconductors and other industrial components have led to production cuts in manufacturing, forcing executives and policymakers to rethink supply lines and try to reduce reliance on a handful of Asian and U.S. suppliers.

Automakers and electronics producers are being hit hard by delivery delays of chips, caused by factory closures during the first COVID-19 wave last year and a spike in demand for semiconductors in an increasingly digitised world.

“We expect the problem with semiconductor shortages to worsen somewhat in the second quarter. It could then normalize from the middle of the year,” said Jens Ulbrich, chief economist of the German central bank, the Bundesbank.

Asked how much growth the bottlenecks would cost the German economy as a whole, Ulbrich said the negative impact was hard to quantify.

“We do see clear signs of slowing down in vehicle production in the first quarter. However, it is not possible to isolate the semiconductor effect, as various other factors also overlap with it,” Ulbrich said.

He pointed to special factors related to Britain’s exit from the European Union which led to pull-forward effects and increased production in the fourth quarter, which then resulted in a certain weakness at the beginning of the year.

“The sales tax increase also played a similar role. Ultimately, only the manufacturers can quantify the effect,” Ulbrich said.

But there is no doubt that the chip bottlenecks and related production cuts will lead to weaker growth this year.

“The recovery will probably be a little less strong than without this specific semiconductor problem,” Ulbrich said.

The Bundesbank expects nonetheless a relatively strong upswing from the middle of the year which will then also be supported by private consumption, he added.

The German government earlier this week lifted its economic growth forecast for this year to 3.5% from 3% previously, counting on a rebound of household spending once COVID-19 restrictions are lifted in the course of the summer.