No year-end sprint for the German economy

Another setback. German industrial production disappointed in December, dropping by 0.6% MoM from +2.4% MoM in November. The two-months-average is still up by 1.5%. On the year, industrial production is now up by 2.6%. The December decrease was driven by weaker production of capital goods (-2.5% MoM) and energy (-2.6%). Production in the construction sector increased by 0.5% MoM. Earlier today, German exports disappointed, dropping by 0.9% QoQ in December. As imports declined by 0.6% MoM, the seasonally-adjusted trade balance narrowed somewhat to 18.5 bn euro, from 18.9 bn euro in November. Over the entire year 2013, the trade surplus reached a new all-time-high of 198.9 bn euro. The 2013 numbers also illustrated the continued decoupling of German exports from the rest of the Eurozone. While exports to Eurozone countries dropped by 1.2% YoY in 2013, exports to other EU countries increased by 2.6% yoy. The dichotomy between soft and hard data has been a striking conundrum of the German economy in recent weeks. Most confidence indicators stand close to all-time-highs and the optimism is strong. At the same time, however, hard economic data has rather disappointed. Today’s numbers were another illustration that the economy did not stage the expected year-end-sprint but rather slowed down. Looking ahead, all puzzle pieces to solve the current conundrum are still there. Despite yesterday’s drop, order books are still filled. Combined with the latest inventory reduction, industrial production should gain new momentum in the coming months. Moreover, the construction sector, driven by the mild winter weather and government investment, should be growth-supportive throughout 2014. Finally, the strong labour market and latest wage increases should further back domestic demand. Of course, there are also risks. From the latest risk events trades at financial markets, an unexpected US slowdown or a Chinese hard landing would in our view be the biggest risks for the German economy. Up to now, the negative impact from emerging market turmoil should remain limited. In fact, as long as China remains relatively stable, German exports should remain relatively unharmed. India, Brazil, Turkey and Argentina are not more important as export destinations than Belgium. With today’s numbers, the last faint hope that fourth quarter growth could still surprise to the upside has disappeared. It looks as if the meagre growth rate of 0.1-0.2% QoQo, suggested by the German statistical office’s first estimate in mid-January, was right. The only upside from this disappointing year-end is that it will make the upcoming growth acceleration more enjoyable.