Preparing for a hard landing? German industrial production crashed in May, increasing fears of a significant slowdown of the economy in the second quarter.
In May, industrial production dropped by 1.3% MoM, from a downwardly revised 0.5% MoM in April. On the year, industrial production was down by 0.4%. Looking at the details, production of capital goods and manufacturing were the main drivers of the slowdown.
After the strong first quarter, the construction sector continued its recent downward correction, dropping by 0.9% MoM; the third consecutive decrease of activity in the construction sector. Particularly the correction in the construction sector is somewhat counterintuitive to anecdotal evidence of an ever-booming real estate sector in Germany.
Today’s industrial production data have increased the risk of a hard landing of the German economy in the second quarter. However, such an assessment could be too simple. In fact, latest data only confirm the picture of a two-speed economy. While the domestic economy is booming, the former growth engines (exports and industrial production) are weakening. With weaker industrial production, a traditional increase in investment becomes also less likely. After a slight increase in early 2015, capacity utilization has not increased further over the last 1 ½ years and even came down somewhat in the second quarter of 2016. In addition, the magnitude at which equipment is currently considered by the German industry to be a hurdle to production is at its lowest level since 1996. Probably one of the reasons why private investment (except for housing) is still not really picking up. Next to weaker production and weaker capacity utilization, new political uncertainties seem to be another impediment to investment growth. Currently, the tight labour market seems to be the only bottleneck for the industry.
All in all, with the ongoing stagnation of the industry, an economic model mainly based on consumption and services might eventually turn out to be too little for sustainable economic growth. Therefore, the discussion on looser fiscal policies in Germany will not disappear.