Sunday, July 6, 2014
Return(ed) to mainland
No more island? German industrial production dropped sharply in May, showing that earlier risk factors like slowing emerging market economies, including China, and geopolitical conflicts do have an impact on the German economy. In May, industrial production dropped by 1.8% MoM, the third consecutive drop. The last time industrial production had dropped for three months in a row was in the summer of 2012. On the year, industrial production is now still up by 1.2%. Today’s drop was driven by a decline in production in manufacturing, intermediate goods and consumer goods. Moreover, the correction in the construction sector continued (-4.9% MoM). In fact, the construction sector has by now lost all gains of the last months and is back at the level of early 2013. Today’s industrial production data adds evidence that the German industry is currently treading water. Already last week, German new orders had dropped by 1.7% MoM in May, with the sharpest drop coming from orders from outside the Eurozone. Interestingly, orders from Eurozone peers had risen for the second month in a row. To be clear, there is no reason to worry. It is more a question of level and change. The overall level of industrial activity is still strong and the safety net for the German industry, richly filled order books and low inventories, is still boding well for the coming months. However, the stimulus for a further acceleration is currently missing. In fact, latest data give the impression that the dichotomy between soft and hard data has returned to Germany. While sentiment indicators, despite recent softening, still point to solid growth, hard data is less encouraging. This dichotomy seems to be an ever-returning phenomenon of the recent German economy. Over the last quarters, the dichotomy always disappeared by itself, with statistical revisions, the weather or domestic demand eventually turning out as the missing link. This time around, it seems to need a return of strong net exports and/or a real consumption boom to avoid a stand-still of the economy in the second quarter. It could take until the third quarter before the dichotomy disappears again. Until then, today’s industrial production data show that the German island of happiness has been brought back to mainland.