A strong rebound in industrial production alleviates growth concerns for the third quarter
German industry remains a mystery. After the shocking drop in July, industrial production surged by 2.5%MoM in August, suggesting that the initial Brexit shock has been digested. On the year, industrial production was up by 1.9%. Growth in industry was driven by all sectors except for construction. After several strong months, the construction sector seems to have taken a long summer break, dropping by 1.2% MoM. With today’s data, the outlook for the third quarter all of a sudden looks much brighter. At least compared with the second quarter, both industrial production and construction are now in growth territory.
Looking beyond the third quarter, however, there is no reason to get overly excited about industrial production. Capacity utilization is still only at its historical average and companies do not consider equipment to be a limiting factor to production, suggesting that investment should remain weak. The best thing about industrial production in the coming months is that it should at least remain relatively stable and should not slow down any further. The process of destocking has come to a (temporary) halt and August new orders brought some relief, showing that order books are still relatively filled.
The construction sector and private consumption should remain the main growth drivers this year. Going into 2017, however, weaker real wage growth and the dropping inflow of refugees should weigh on consumption growth. In this regard, it does not come as a real surprise that the German government yesterday agreed on a small package of tax relief for households for 2017 and 2018. One year ahead of the national elections, this clearly has the flavour of an election present. However, before anyone gets carried away by the idea of big-scale fiscal stimulus in Germany, the announced tax relief should amount to only 6bn euro, spread over two years. Less than 0.1% GDP per year. Up to now, the discussion has unfortunately not yet shifted towards incentives for more corporate investments, better access to start-up financing and venture capital and public investments in education and high technology infrastructure; instruments to boost long-term growth rather than providing short-term stimulus.
All in all, today’s strong industrial data take away some growth concerns for the third quarter. Recent developments, however, indicate that Germany’s B&B problem (banks and Brexit) is not over, yet.