Wednesday, November 7, 2012

Industrial slowdown continues

The slowdown continues. German industrial production dropped by 1.8% MoM in September, from -0.4% in August, providing further evidence that the economy’s backbone is quickly losing steam. In annual growth terms, industrial production is down by 1.2%. The drop was mainly driven by all manufacturing sectors. Only the construction sector recovered from its August decline, increasing by 2.7% MoM. Interestingly, despite today’s drop, industrial production was still stronger in 3Q than in 2Q.

The German decoupling from the rest of the Eurozone has come to an end. Strong trading ties with non-Eurozone countries had shielded the economy against the euro crisis. Now, with the global economic cooling in the second half of the year, this immunity is quickly fading away.

Looking ahead, latest indicators do not give much hope that the current downward trend will reverse any time soon. Business sentiment has been on a Yesterday’s new order data was again a disappointment. In September, new orders from non-Eurozone countries dropped by almost 6%, while new orders from Eurozone peers even plunged by more than 11% MoM. At the same time, companies have started to increase inventories. The increasing discrepancy between built-up inventories and emptying order books does not bode well for the near-term outlook for the German industry. However, if the recent positive cyclical trends from the US and Chinese economies prove to be sustainable, the German industrial slowdown could be rather short-lived with a rebound in the first half of 2013.

Today’s industrial production data send a two-fold message: on the one hand, it confirms our view that the German economy could have avoided a contraction in the third quarter. However, on the other hand, it also confirms our view of gradual stagnation. In short, the German economy is stuttering but not (yet) plunging.

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