Monday, February 6, 2012

Drop in German IP confirms economic contraction

German industrial production dropped by 2.9% MoM in December, providing the final piece of evidence that the German economy shrunk in 4Q 2011, for the first time in almost three years. On the year, industrial production is still up by 0.9%. The drop was widely-spread across all sectors, with the sharpest drop in the construction sector (-6.4% MoM) and capital goods (-3.6% MoM). Compared with the third quarter, German industrial production is down by more than 2%.

A nice and long stretch of ten consecutive quarters of economic growth has come to an end. Since German reunification, the economy had only experienced one similar period of non-stop growth and that was between 2005 and early 2008. As in 2008, the end to the economic expansion was not homemade but driven by external factors. This time around, the Eurozone debt crisis finally took its toll on the German economy, forcing companies to reduce production. The pea counting of all available data for the fourth quarter up to now shows that the contraction of the economy was driven by both the industrial sector and private consumption. Only the construction sector grew slightly, despite today’s sharp drop, benefitting from the mild October and November weather.

Looking ahead, there are several factors pointing towards a quick rebound of the German economy. Yesterday’s increase in new orders shows that there is still sufficient lube oil for Germany’s economic engine. In fact, December was the first month since the summer in which inventories were reduced and orders at hand increased; a combination which bodes well for industrial production in the coming months. Of course, the very cold winter weather could at least temporarily spoil or delay a rebound. So far, the very cold temperatures should have been less harmful for the economy than last year’s heavy snow. However, this could change. Moreover, even if the German economy is not yet suffering from energy distortions, despite last year’s closing down of seven nuclear power plants, a long and cold winter could weigh on German trade.

Today’s industrial production data confirms the slowdown of the German economy. However, it is neither a crash landing nor a belly flopper but only a breather. Even if today’s numbers look bad, for the German economy this should have been as bad as it gets.

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