German IP disappoints in September

Temporary slowdown? German industrial production lost some momentum in September, dropping by 0.9% MoM, from an upwardly revised 1.6% increase in August. On the year, industrial production is now up by 1.0%. The drop was broadly-based, driven by all sectors except for energy, with the sharpest drops in the production of capital goods (-2.1% MoM) and in the construction sector (-1.8%). Despite today’s drop, German industrial production is still up compared with the second quarter, pointing to a GDP growth rate of around 0.3% QoQ in 3Q. Looking ahead, today’s drop should be a one-off, rather than the start of a new trend. To the contrary, the short-term outlook for industrial production has actually brightened. Since the start of the year, order books have increased by more than 7% and there are encouraging signs that industrial production should rather accelerate than decelerate in the coming months. Production plans are at the highest level in more than two years and inventories just dropped to the lowest level since September 2011, boding well for future industrial production. Moreover, the increase of recruitment plans to the highest level since June 2012 indicates that the industrial sector is also returning as a source of future employment growth. Despite our positive take on the German industry, some stains on the white shirt remain. Since the beginning of the year, foreign new orders have increased faster than domestic orders; new grist for the mills of critics of Germany’s export-orientation. In our view, this criticism is unjustified, at least when it comes to the export part of the story. The German export success is mainly driven by external demand, which has often proven to be rather price-insensitive, and not by manipulative economic policies. At the same time, however, it is undisputed that domestic demand has been sluggish for too long. Just more consumption will not do the trick. What the German economy, in our view, needs is more domestic investment. In this regards, the fact that industrial capacity utilisation remains below its historical average indicates that new investment will probably not come from traditional capacity investment but rather from investments in other areas like innovation, energy transition, infrastructure and education. Earlier this year, there still had been doubts about the strength of the German industry and its waning role as a growth driver. Despite today’s setback, these doubts have been unjustified. In the coming months, the industry should continue its comeback as the backbone of the German economy.