Friday, December 7, 2012

German IP crashes in October

Heading towards contraction. German industrial production dropped by a sharp 2.6% MoM in October, from -1.3% in September, providing further evidence that the economy’s backbone is quickly losing steam. In annual growth terms, industrial production is down by 3.7%. The drop was driven by all sectors except for non-durable consumer goods. Production in the construction sector fell sharply by 5.3% MoM.

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. The thinning out of order books throughout the year is finally feeding through to the real economy.

There are currently two opposing trends in the German economy. In the short term, the “deflating” of order books on the back of the euro crisis and a weaker global economy should continue to feed through to activity. With today’s industrial production data, a contraction of the economy in the fourth quarter has almost become inevitable. Even a technical recession of two consecutive quarters cannot be excluded entirely, particularly if the fiscal cliff negotiations in the US disappoint and hamper the US recovery. Looking beyond the next one or two quarters, however, the German economy should be able to pick up speed relatively quickly. The latest improvement in confidence indicators and new orders clearly indicate that the current industrial slump should be rather short-lived.

Our general take on the German economy remains positive. However, today’s industrial data shows that unfortunately things first have to get worse before they get better.

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