Wednesday, September 8, 2010

High-flyer touches base

Industrial data shows that the high-flyer of the second quarter has been brought back down to earth, supporting the ECB’s cautiousness.

The third quarter has started on a negative note as the first batch of real economic data brought back a good dose of realism. Retail sales, new orders, and exports were all down and only industrial production showed some meagre growth. However, there is no need to panic. The industrial recovery is not over. But it will continue at a slower pace.

German industrial production only grew by 0.1% MoM in July. This was already the second consecutive month with disappointing industrial numbers. However, this pause of the upswing should remain temporary. Leading indicators, richly filled order books, the drop in short-work schemes and anecdotal evidence of labour shortages all point towards a renewed pick-up in industrial production in the coming months.

Exports also took the expected break after an impressive surge in the second quarter, dropping by 1.5% MoM. As imports at the same dropped by 2.2%, the trade surplus still improved. Looking ahead, German exports will have to deal with two downward risks: slower global demand and fiscal consolidation in other Eurozone countries. While these risks are for real, we do not expect them to choke off the export recovery. First of all, demand from emerging Asia and, in particular, China should remain stable and even demand from other industrialised countries should not entirely be dismissed. Secondly, German manufacturers could also benefit from a possible next investment initiative in the US. Finally, the impact of fiscal consolidation in the Eurozone on German exports should be marginal. The share of the Eurozone periphery countries in total German exports is still small. In the first half of this year, exports to Spain, Portugal, Greece and Ireland only totalled slightly more than 5% of total German exports.

Latest German data were a harsh reminder of the inevitable growth slowdown in the second half of the year. The slowdown of industrial activity also shows that a transition towards more self-sustained growth is not only desirable but really necessary. As long as even the recovery in the Eurozone’s showcase economy is not on solid footing, the ECB has no reason at all to change its current cautiousness.

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