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.