August IP adds positive colours to German outlook

German industrial production rebounded in August, pointing to solid growth in the third quarter. Industrial production increased by 1.4% MoM, from a 1.1% decline in July. On the year, industrial production is up by 0.3%. The increase was mainly driven by strong growth in the production of capital goods (+4.4% MoM), while the production of durable consumer goods dropped (-2.1%). After two strong months, production in the construction sector declined by 1.9% in August. The German economy is gradually leaving the disappointing July numbers behind. While exports and retail sales still cast some doubts about 3Q growth, today’s industrial production numbers paint a more positive picture. It looks as if the German economy has returned to its trend growth rate of around 0.3-0.4% QoQ. Looking ahead, in the short term, the prospects for German industry remain positive. Industrial production should further benefit from the recent inventory reduction and the increase in new orders earlier this year. According to the latest surveys, companies have reduced their inventories to 2011-levels. In the medium term, however, the export engine is facing new challenges like for example the US debt crisis, only gradually stabilising Eurozone economies and weaker growth momentum in emerging markets. Solid domestic demand should remain an insurance against unexpected export surprises but any bigger investment initiatives, which eventually should come to light during the current coalition talks, could come right on time.