Carsten Brzeski’s blog

German industry disappoints but exports surge

German industrial production disappointed in March, indicating that the industry of the Eurozone’s largest economy is still struggling to gain momentum.

In March, industrial production dropped by 1.3% MoM, from -0.7% MoM in February. On the year, industrial production was up by 0.3%, reflecting the current stagnation of the German industry. Looking at the details, all sectors except for energy dropped significantly in March.

At the same time, exports increased by 1.9% MoM in March, from 1.3% in February. As imports dropped by 2.3% MoM in March, the seasonally-adjusted trade balance widened to 23.7bn euro. A new all-time high. The strong increase in exports shows that the cooling of the global economy cannot have been as severe as some feared at the beginning of the year. Interestingly, at least in the first two months of the year, France has again taken the number one spot as Germany’s most important export destination accounting for more than 9% of all German exports. The US has dropped to number two (8.7% of total exports), probably reflecting the partial loss in momentum.

With stagnating industrial production but increasing exports, the question almost seems to be what exactly is it that German companies are currently exporting? More seriously, today’s data was another reminder that the industrial production has become a kind of problem child of the German economy. Even if parts of the drop might be due to the timing of the Eastern vacation, the overall trend is not very promising. Moreover, the strong domestic economy had also not, yet, led to booming industrial production; except for the construction sector. As a result, capacity utilization in the German industry is currently still not higher than historical averages, providing another explanation for rather sluggish domestic investment.

Nevertheless, despite today’s drop, industrial production is still up compared with the final quarter of 2015 and particularity the construction sector has grown strongly, in itself already worth some 0.3 percentage points of GDP growth.

All of this means that despite the disappointment about today’s industrial production data, everything seems to be set for a decent growth performance of the German economy in the first quarter (to be released on Friday). However, under the surface of strong growth numbers a more worrying picture is emerging. The economy is no longer driven by the old success formula but by new factors: consumption, construction and services. A formula which definitely is no guarantee for sustainable success.