German economy still struggling to shift up one gear

Mixed start of the fourth quarter. This morning’s data cast new doubt over the strength of the German economy. Particularly the second consecutive drop of industrial production indicates that the economy really needs two strong months if it still wants to meet the high expectation in the final quarter of the year. In October, industrial production dropped by 1.2% mom, after a 0.7% drop in September. On the year, industrial production is still up by 1.0% yoy. The decrease was broadly-based, driven by all sectors, with the sharpest drops in the production of capital goods (-3.0% MoM) and durable consumer goods (-4.5%). After the revival in the first half of the year, the construction sector continued its latest slowdown, decreasing by 1.7% mom. Earlier this morning, October trade data showed a new record high for German exports. In non-seasonally adjusted terms, German exporters sold goods worth 99.1 bn euro. In seasonally-adjusted terms, exports rose by 0.2% mom, after 1.6% in September. Since May, German exports have increased by more than 3%. Another month of German export successes should, however, be no reason for new international criticism as at the same time imports increased by 2.9% mom. As a result, the German trade surplus narrowed to 16.8bn euro, from 18.7 bn euro in September. The trade balance with the rest of the Eurozone is, by the way already, in balance. Germany’s trade surplus is mainly a result of its export successes outside of Europe. Looking ahead, filled order books and the low level of inventories still bode well for industrial activity. Moreover, the less prominent Sentix indicator, which measures investors’ expectations, today increased to the highest level since April 2011 in December. Expectations even reached their highest level ever since the start of the survey in 2009. Over the last months, the Sentix indicator has been an excellent leading indicator for more prominent indices like the ZEW and Ifo index. If this track record continues, the economy could end the year 2013 on another wave of enthusiasm. However, the real economy will have to catch up. Otherwise it could become a rather sentimental wave of enthusiasm. With a narrowing trade surplus and dropping industrial production the German economy did not have the overwhelming start to the fourth quarter confidence indicators had suggested. Still, in our view, the economy should pick up speed again, ending the year on a positive note.