Industrial engine is still stuttering.
German industrial production continued the recent trend of stagnation, dropping by a shocking 1.5% MoM in July, from 1.1% in June. On the year, industrial production was down by 1.2%, from 0.9% in June. Looking at the details, production of capital goods and consumer goods were the main drivers of the sharp drop in July. After a disappointing second quarter, the construction sector showed some signs of life, increasing by 1.8% MoM. The sharp fall in industrial production is a bad start of the third quarter. Even if industrial production data in the summer months is often subject to later revisions, the sharp drop will feed worries about a further cooling of the German economy.
It is impossible to link stagnating industrial to one single factor. The trend already started long before the British referendum but clearly the Brexit vote should have been one of the main drivers behind the sharp July drop. More generally speaking, the German industry seems to suffer from weaker activity in China, struggling Eurozone peers and a general shift away from manufacturing towards services. With this in mind, chances remain low that the former backbone of the German economy will quickly return to its old strength.
All in all, today’s industrial production data provides further evidence that the German economy is increasingly becoming dependent on domestic consumption. In this context, the current political discussion on possible tax cuts could in our view better shift towards incentives for more corporate investments, better access to start-up financing and venture capital and public investments in education and high technology infrastructure; instruments to boost long-term growth rather than providing short-term stimulus.