Thursday, November 5, 2015
Disappointing IP data doesn't bode well for Q3 GDP
More headwinds. German industrial production disappointed in September, adding to evidence that the Chinese and emerging market slowdowns are also leaving their marks on the Eurozone’s largest economy. Industrial production dropped by 1.1% MoM in September, from an upwardly revised decline of 0.6% in August. On the year, industrial production is now only up by 0.2%. Looking at the details, the weakening in industrial production was driven by almost all sectors, with an outstanding drop of 3.2% MoM in consumer goods. Even the stronghold of the industry, the construction sector, dropped by 0.9% in September. The summer weakness of the German industry seems to be more substantial than only a vacation-driven soft spell. Over the last couple of months, the industrial safety net of low inventories and filled order books has become thinner. Somehow, the weak euro and extremely favourable financing conditions have not fully deployed their full impact on the economy, yet. Since the end of last year, industrial production has remained flat. In the same period, exports have grown by 1% on average each month. Strong confidence indicators, sluggish production and booming exports. This seems to be the new conundrum of the German economy, bringing back the memories of the discussion on a possible “bazar economy”. Today’s data shows that the German industry has not been able to fully escape the negative impact of the slowdowns in China and other emerging markets. Moreover, there might be another interesting aspect, currently affecting the German industry: low oil prices, or better too low oil prices. While low oil prices are clearly not only benefitting German consumers but also producers by lowering production costs, the current question is whether oil prices have actually dropped too far, hurting demand from for German products from oil-exporting countries. This phenomenon of oil bill recycling, ie stronger demand from oil-exporting countries, in the past shielded the German industry against higher oil prices. Looking ahead, it does not look as if industrial production is about to accelerate any time soon. Although production expectations have increased in recent months, the reality of weaker order books and stable inventories looks somewhat less promising. For next week’s Q3 GDP release, today’s data do not bode well. Industrial production is down on the quarter, construction activity is up on the quarter, putting all hopes on net exports and private consumption. We still have to wait for Monday’s trade data but with today’s data our current estimate of 0.3% QoQ growth in Q3 all of a sudden looks rather optimistic.