Blog Carsten Brzeski

Germany: Industrial hibernation

As so often in recent years, the German industry has taken a longer winter break, with industrial data disappointing at the start of the year.

Just released industrial data confirms the weak start of the German economy to the new year. After yesterday’s disappointing new orders data, industrial production and trade were also weaker than expected. Industrial production dropped marginally in January by 0.1% MoM, from -0.3% MoM in December. On the year, however, industrial production is still up by 5.5%. Interestingly, activity in the construction sector continued its downward trend of the last quarters. At the same time, exports and imports both declined by 0.5% MoM respectively, narrowing the trade surplus to 17.4bn, from 18.2bn in December. Finally, the German statistical agency also released a number that will definitely catch the ECB’s attention: labour costs slowed down in the fourth quarter of 2017 to 1.5% YoY, from 2.2% in the third quarter.

A lot of data, which clearly ask the question how to read them. In our view, the weak start to the new year is nothing new for the German economy. It is a phenomenon witnessed more often in recent years that German economic data has been overly sensitive to seasonal effects and vacation planning. And indeed, at least in our view, weak January data are rather a sign for an extended vacation period after Christmas than a structural slowdown at the end of a mature cycle.

At least in the near term, prospects for the German industry have hardly ever looked rosier. Capacity utilization is at its highest level since 2008, the last time equipment was regarded as such a strong limitation to production by companies as currently was in in 2007, order books are filled and companies currently reported the longest period of assured production ever.

As regards trade, obviously, currently the biggest risk for German exports seems to come from the US, illustrated by US president Trump last night’s announcement of import tariffs. In fact, the risk for Germany is for real. In 2017, the US was Germany’s largest export partner. The bilateral trade surplus amounted to more than 50bn euro, with vehicles and machinery recording the largest bilateral surplus. At the same time, Germany runs a significant trade deficit with the US in agricultural products. The only comforting factor for Germany is that it has a very diversified export sector. Looking at bilateral trade data for the entire last year, the geographic diversity of German exports once again seems to be the key to success. Particularly, Germany’s close and distant neighbours in the East have safeguarded last year’s export revival. Germany currently exports as much to Hungary, Poland and the Czech Republic as it does to the Netherlands, Belgium and Luxembourg. Exports to China have also rebounded.

In recent days, some darker clouds have appeared at the German economic sky. New protectionism would definitely hurt the self-proclaimed export world champion and the Italian elections could slow down current europhoria. However, at least for the near term, there is plenty of evidence that the German economy will power ahead. And as regards the longer term, latest events should be a clear reminder to the new German government that complacency, neither on Eurozone integration nor on domestic investment, is not an option.