Industrial production in Europe's biggest economy fell 1.5% in June compared with May, driven by a 3.5% drop in Germany's vast automotive sector.

The decline in German industrial output, much steeper than forecast by economists, raises the risk that the manufacturing heavyweight will contract again later this year, potentially falling back into recession.

The construction sector, where output shrank by 2.8%, also had a negative impact on overall industrial production, the country's statistics office said Monday.

Germany only just emerged from a recession in the April-to-June period as gross domestic product (GDP) was flat compared with the previous quarter, but the latest provisional data suggests the slight improvement in the economy's fortunes may not last.

"We expect a drop in industrial output to be one of the factors causing a renewed contraction in German GDP in the second half of this year," Franziska Palmas, senior Europe economist at Capital Economics, wrote in a note.

Jörg Krämer, chief economist at Commerzbank, also predicted a fall in GDP later this year.

Auto woes

The German car industry, which accounts for around 5% of the economy, is struggling to recover from the blow dealt by the pandemic and snarled supply chains.

Some 2.2 million cars rolled off production lines in the first half of the year, according to the German Automotive Industry Association. Although that was a significant increase compared with the same period in 2022, production is still 10% lower than in the first half of 2019. Reaching the pre-pandemic level of output may take a while yet.

"In view of the overall economic situation and the development of incoming orders, it can be expected that the high [production] growth rates will soon slow down. The high order backlog is slowly being reduced," Hildegard Müller, the president of the industry body, said in a statement last month.

In other parts of Germany's industrial sector, which includes energy production, prospects appear brighter. New orders in manufacturing jumped 7% in June from the previous month, provisional data showed Friday, although the figures were distorted by large-scale orders.

"German industry remains in rough waters," Salomon Fiedler, economist at Berenberg, said in a note Monday, noting last year's energy price shock and weakness in US and Chinese demand, among other factors.

Volkswagen, Europe's largest carmaker, has been grappling with sluggish sales in China — its single biggest market — losing out to local competitors.

The company reported a 14.5% drop in its deliveries in China in the first quarter. It saw a recovery in April and May but deliveries in the first half overall were still 1.2% down on the same period in 2022.

Germany's broader industrial sector has had to contend with high energy prices, which were already rising in Europe when Russia invaded Ukraine in February 2022, sending them to record highs. European natural gas prices have since tumbled to stand 44% below their pre-war level.

Berenberg expects Germany to fall back into "a mild recession" in the second half of this year, Fiedler added.

— Mark Thompson and Anna Cooban contributed reporting.