A bad day

Today’s macro data were disappointing. German exports dropped by 2.4% MoM in May, from +1.4% MoM in April. At the same time, imports increased by 1.7% MoM, narrowing the seasonally-adjusted trade balance to 13.1 bn euro, from 18.0 bn in April. At the same time, industrial production lost parts of its April gains and decreased by 1.0% MoM in May. On the year, industrial production is now down by 1.0%. The drop was broadly-based, driven by all sectors, with the sharpest drops in the production of capital goods (-2.3% MoM) and in the construction sector (-2.6%). Interestingly, despite the drop industrial production is still up by around 2.5% compared with the first quarter.

Definitely not a good day for the German economy. Combined with last week’s drop in factory orders, evidence is increasing that the Eurozone’s economic engine is still not running smoothly. The big question is whether this is the result of a structural weakness or special factors?

Some market observers have used yesterday’s data as support that the German economy is weaker than it is often presented. Indeed, the economy has been the stronghold of the Eurozone economy since the start of the crisis but it is not without soft spots. There are obvious structural challenges ahead and German politicians should use the economic good times to continue with structural reforms. Amongst the important issues in the years ahead the most pressing ones are the challenges stemming from ageing and the lack of domestic investments. Nevertheless, these structural challenges are not the reason for yesterday’s disappointing data. In our view, it is the special factors.

In fact, German data since the beginning of the year have been highly erratic. Unusual discrepancies between hard and soft data combined with big monthly swings have made it harder to identify the real strength of the economy. In fact, the only constant of the German economy was private consumption on the back of the solid labour market and recent wage increases. Exports and industrial production have been affected significantly by the harsh winter weather, a holiday-loaded month of May and to lesser extent by struggling economies elsewhere. While other economies are currently suffering from volatile markets, the German economy is suffering from a weather- and holiday-driven volatility.

For the time being, German data is so erratic that it is something for everyone. Both for optimists and pessimists. In our view, optimists should prevail as the sound fundamentals of the economy have not disappeared.