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Blog Carsten Brzeski

Germany: Breather in midst of strong growth

German industrial production slows in March but bodes well for Q1 growth 
German industry takes a breather. German industrial production recorded the expected small drop after two impressive growth performances in January and February. In March, industrial production dropped by 0.4% MoM, from 1.8% MoM in February. The drop was driven weaker production of energy (-2.5% MoM) and capital goods (-1.2%). On the year, industrials production is up by almost 2%. The construction sector continued its recent surge, growing by 1.5% MoM, from 9.9% MoM in February. At the same time, Germany’s seasonally-adjusted trade surplus narrowed somewhat to 19.6bn euro, from 21.2bn euro in February. While exports increased by 0.4% MoM, imports accelerated by 2.4% MoM.

Bilateral trade data shows that Brexit has left further marks on the German economy. While in 2015 around 7.5% of all German exports went to the UK, it was only 7.1% in 2016 and the shared dropped to 6.9% in the first two months of 2017. The Brexit negotiations and a possible further weakening of the Pound Sterling should continue this trend in the coming months, pushing the UK out of the Top3 of Germany’s most important export destinations.

More generally speaking, given that only one third of all German exports go to other Eurozone countries, it is obvious who has been one of the main beneficiaries of the weak euro. In this regards, even today’s narrowing of Germany’s trade surplus will do little to undermine the permanent international criticism of Germany’s current account surplus. Interestingly, yesterday’s first official political reactions from Berlin on Macron’s victory suggested that at least the government’s position on investments could change in the coming months.

A subtle change of the fiscal stance could then coincide with a general pick-up in private sector investments. Interestingly, signs of a gradual upswing in industrial activity are finally emerging. Two positive new orders data were a good start, accompanies by buyant confidence indicators. Also, there are more fundamental factors arguing for a more positive take on the German industry and investments. The combination of strong orders at hand and low inventories is currently as good as in mid-2006 and late-2010. Capacity utilization has almost unnoticed increased to the highest level since late 2008. And, according to surveys, companies currently consider equipment as a limiting factor to production as pressing as in the first quarter of 2012, even though labour is still mentioned as the most important limiting factor.

All in all, despite the small drop in March, industrial production should have returned as a growth driver for the German economy. In fact, the construction sector alone has been one powerful source of economic growth. Also, evidence is increasing that industrial production and investments are finally catching up with the rest of the economy. It is too early to celebrate the long-awaited and often never materialsed pick-up in investments. However, if it comes, the current positive cycle of the German economy would be extended once again, even though structural reforms are still missing.