Although partly blurred by seasonal effects, May industrial production data signals continued strength of the German economy.
German industrial production recorded a strong month of May, increasing by 1.2% MoM, from 0.7% MoM in April. The increase was driven by stronger activity in the energy sector and the production of capital and consumer goods. Activity in the construction sector dropped by 1% MoM, from 0.2% in April, on the back of seasonal effects. On the year, and driven by base effects, industrials production jumped from 2.8% in April to 5.0% in May.
German economic data have been slightly blurred by seasonal effects. Given several public holidays and long weekends in May, the technical rebound after the Easter effect in April has probably been somewhat muted and should only fully unfold in June. Still, this week’s industrial data suggest that the divide between strong soft and lagging hard data is gradually disappearing.
Looking ahead, the big question for the German (and actually the entire Eurozone) economy is whether hard data can continue to catch up with buoyant soft data or whether the current eu(ro)phoria could take a hit in the coming months. In our view, at least the German economy will do what everyone expects it to do: continue to power ahead. Particularly if the current tentative signs of a pick-up in investment and industrial production prevail. The combination of strong orders at hand and low inventories is currently as favorable for future production 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. With industrial production now being a lagging, and no longer a leading, indicator, the current positive cycle could easily be extended once again, despite the absence of any new structural reforms.
Even if there is still some room for improvement, today’s data confirm that Germany’s industry has finally started to catch up with buoyant sentiment indicators. The current eu(ro)phoria can live on.