Blog Carsten Brzeski

Germany: Hopeful rebound

A rebound in industrial production in January shows brings some relief for the economy. However, despite today’s increase, the overall outlook for the industry remains modest.

After yesterday’s shocking new orders data, today's industrial production data brings some relief for the Germany economy. Industrial production rebounded in January, increasing by 2.8% MoM, from -2.4% MoM in December. On the year, industrial production has remained flat. The January increase was mainly driven by stronger production in capital goods (+6.1% MoM). The cold winter weather is still taking its toll on the construction sector, which shrank for the second month in a row (-1.7% MoM). Given the cold February, the negative trend in the construction sector could continue another month before returning as an important growth driver for the entire economy.

Today’s increase in industrial production shows that the shocking drop in December was mainly driven by the Christmas season and the cold winter weather. At the same time, however, the fact that on the year industrial production has remained flat shows just how difficult it is for the industry to get out of stagnation. Therefore, it does not come as a surprise that capacity utilisation in the industry is still only marginally above its historical average and clearly below the last peak in 2007 and 2008, despite a record long expansion of the German economy.

However, there are the first tentative signs indicating that some improvement is in the making, as inventories have been reduced over the winter months. Also, the biggest problem and speed limit to the German economy currently seems to be undergoing a small positive change: investment. Equipment as a limiting factor to production is currently at the highest level since the beginning of 2014; even though the absolute level is still relatively low, and loans to non-financial corporates have finally started to pick up since the start of 2016, currently growing at almost 3.5% YoY.

In sum, this week’s data confirms that the German industry is still struggling to gain momentum, even though some improvement over the course of the year could be in the offing.