German manufacturing rebounds from the bottom?

Goldman Sachs, by tracking truck mileage and defense orders, has discovered that the underlying driving force of Germany’s manufacturing—the engine of the European economy—is quietly restarting.

According to Chase the Wind Trading Desk, Goldman Sachs’ economics research team pointed out in a report published on February 6 that although German industrial production (IP) has continued to decline since peaking in 2017/18, signs of a bottoming out began to appear last year.

Despite unexpectedly weak data in December, this was more statistical noise than a trend reversal. By building a more refined statistical model, Goldman Sachs believes German manufacturing is on the eve of a cyclical recovery, expecting “solid growth” driven by domestic demand and fiscal expansion in the first half of 2026.

The “true signal” in truck mileage?

The biggest pain point of German macro data is “extreme instability.” Industrial output, orders, sales as well as various survey data frequently emit contradictory signals. For example, the decline in industrial output in December ended three consecutive months of strong growth, once again triggering market concern, while at the same time, the recovery in manufacturing orders diverged from it.

To see the truth clearly, Goldman Sachs constructed a “Nowcasting” framework. Analysis found that compared to PMI data, truck toll mileage and manufacturing sales are more accurate predictors of recent industrial output.

Based on hard data and survey data up to now, Goldman’s model provides a clear short-term forecast:

“Our model currently forecasts that, following December’s weakness, industrial output in January will rebound (expected month-on-month growth of 1.5%).”

This is not just mean reversion, but a logical extrapolation based on order growth and a recovery in business climate. This means that the market should not be scared off by one month of weak data—short-term fluctuations mask the actual warming of activity.

First half of 2026: Backlog orders release growth potential

To avoid the violent swings in monthly data (usually a month of high growth followed by low growth), Goldman further developed a “Dynamic Factor Model (DFM)”, extracting common signals from 82 subdivided variables. This integrates 82 variables, including orders, sales, and IFO climate indicators across 24 industries.

The model’s “Spot Factor” has already delivered a clear recovery signal since the end of summer 2025. Although this improvement is not linear, the direction is clear.

However, investors need to be patient. Although order growth is strong, it is mainly concentrated in sub-sectors with severe backlogs. This means the transmission chain from “receiving orders” to “output” is longer than usual. Goldman Sachs emphasizes:

“It may take longer than usual for order growth to translate into production growth, indicating that the increase in production activity will be gradual.”

Nevertheless, the model still points to a positive medium-term outlook: Underlying industrial momentum indicators have risen to recent highs, indicating that in the first half of 2026, Germany’s economy will usher in a recovery driven by domestic demand.

“Fiscal Dividend” hedges “External Headwinds”

However, it needs to be noted that the recovery of German manufacturing is not across the board, but shows sharp structural differentiation.

On one hand, the auto and parts industries, as well as energy-intensive sectors (which together account for more than 30% of production), still face challenges. These sectors are restricted by intensified global competition and uncertainty in external demand, and remain sluggish. Goldman’s data show that industries highly exposed to external competition risks recover output noticeably slower.

On the other hand, fiscal policy is becoming the new growth engine. Benefiting from expansionary fiscal policy, domestic-demand-oriented industries show greater resilience. Among them, the defense industry has become the brightest “new star.”

“The defense industry is especially demonstrating a fiscal-driven recovery of domestic demand, and we expect this to be a sustained tailwind until 2026.”

As maintenance and procurement expenditures are set to roughly quadruple from 2024 to 2029, defense-related orders, sales and production have already seen significant growth. This growth extends beyond weapons and ammunition into a wide range of sub-sectors such as specialized clothing, optical equipment, and electronics.

For the market, the logic is clear: Germany’s growth story is shifting from “export-oriented” to “domestic demand and security-driven.” Although the external environment remains complex, the certainty of domestic fiscal spending is providing a floor for manufacturing.

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The above exciting content is from Chase the Wind Trading Desk.

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