Wednesday, August 7, 2013

Industrial production points to strong growth comeback of German economy

Impressive comeback. The German economy is on a good way towards an impressive growth comeback in the second quarter. Industrial production increased by 2.4% MoM in June, after an 0.8% MoM drop in May. The increase in production was broadly-based across all sectors. Production in the construction sector increased by 1.6% MoM. Compared with 1Q 13, industrial production was up by 3.4% in 2Q.
Slowly but surely industrial activity has returned as an important growth driver for the German economy. Since the turn of the year, inventories have remained rather stable, while new orders have gradually picked up. Moreover, the construction sector has staged – the expected – comeback after the harsh winter. Yesterday’s new order data confirmed that the industrial engine will not run out of fuel any time soon. A monthly increase by almost 4% was rather impressive. In fact, improving new orders is not a one-off.  Order books have gradually thickened over the last six months with a quarterly increase of 0.5% QoQ in 1Q 13 and 1.2% QoQ in 2Q.

It looks as if the German economy is again walking on two feet: solid private consumption and strengthening industrial activity. Looking ahead, the biggest short- and medium-term risks for the German economy seem to stem from a further softening of economic activity in emerging economies, above all China, and a longer-lasting economic slump in Germany’s main trading partner: France.

Moreover, another pressing issue for the German economy is weak domestic investment. Yesterday, in its latest Article IV report, the IMF linked weak domestic investment to the euro crisis and falling German exports to Eurozone peers. In our view, there is more to German investment weakness than the euro crisis. In fact, weak domestic investment is not only a recent phenomenon but has been accompanying the German economy for much longer, driven by a preference for foreign rather than domestic investments in the private sector and a significant reduction of public investments. One way or the other, the next German government will have to address the issue of domestic investment to ensure Germany’s leading economic role.

With this week’s data a long rollercoaster ride of the German economy is coming to an end. Since the start of the year, German macro data has been highly erratic. Harsh and persistent winter weather, early Eastern, public holidays and vacation frequently blurred the data and required an extra portion of gut feelings to look through short-term fluctuations. The month of June was the first noise-free month; the month of truth. Data released so far has been very promising, sending two messages: i) the German economy should have staged an impressive growth comeback in the second quarter (with growth somewhere between 0.6% and 0.8% QoQ); and ii) such a comeback could be sufficient to have pushed the entire Eurozone out of the recession.

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