Sunday, April 6, 2014

Feb industrial production - German economy is powering ahead

Full speed ahead. German industrial production continued the positive trend of the last months, increasing by 0.4% MoM in February. In January, industrial production grew by 0.7% MoM. On the year, industrial production is now up by 5%. The February increase was driven by the manufacturing sector (+0.5% MoM) and the production of intermediate goods (+1.3% MoM), while production in the energy and construction sector declined somewhat. Despite today’s drop of 0.1% MoM, the German construction sector is booming. Over the last four months, the construction sector has grown by a monthly average of 1.6% and order growth of more than 10% yoy suggests that the boom should continue. For the first quarter, construction should have been an important growth driver for the entire economy. Even if the sector would not grow at all in March, it could add around 0.5%-point to German GDP growth. More generally speaking, latest hard data has closed the gap between buoyant confidence indicators and weak economic activity. Since the start of the year, hard economic data has accelerated. Looking ahead, the German economy should gain further momentum. The formula for success is still the same: the labour market remains tight, order books are filled and inventories are at a 2 ½ -year low. The big unknown in this success formula remains domestic investment. Having been a drag rather than a push-factor for growth over the last years, domestic investment has started to gradually pick up last year. Gross operating surpluses at all-time highs, strong liquidity positions and some capital repatriation argue in favour of strong investment growth. On the other hand, however, capacity utilisation rates are only at, but not above, historical averages and recent surveys show that German companies hardly see equipment as a constraint for production. In our view, domestic investment should continue to pick up, but only at a subdued level. Investment growth this year should rather be a cyclical rebound than a structural shift. All in all, today’s numbers confirm once again that a strong growth performance, at least in the first quarter, is in the making. The German economy is powering ahead.