Carsten Brzeski's blog

Germany: Cold summer shower

Industrial production disappointed in June, pouring some cold water on recent growth optimism

German industrial production surprisingly disappointed in June, dropping by 1.1% MoM, versus +1.2% growth in May. The drop was driven by weaker production of capital, consumer and intermediate goods. Only activity in the energy sector was stronger. Activity in the construction sector dropped for the second month in a row (-1.0% MoM, from -1.3% in May). On the year, industrials production was up by 2.5% in June, from 4.9% in May.

While the April and May data had been slightly blurred by seasonal effects, today’s industrial production data probably show the purest face of the German industry. And it is a mixed face; neither overly enthusiastic, nor overly depressed. Despite today’s drop, industrial production is still up compared with an already strong first quarter. Despite two sluggish months, the construction sector has been a growth driver in the second quarter. Even though today’s data are a negative surprise, hard data is still catching up with soft data; only not as impressively as some might have hoped.

With little risks from the outside, Germany has created its own domestic problems. The latest scandals and events in the automotive industry could – but not have to – eventually harm the German economy. The automotive industry is currently in the middle of structural changes; partly self-inflicted and partly stemming from external factors. To some extent, the industry is in a similar situation as the banking sector. In Germany, the self-inflicted part goes back to the diesel emission scandal and the latest antitrust allegations, while at the same time possible bans of diesel bans in cities have emerged, international competition for electric vehicles has increased and phenomena like car sharing could also put pressure on future automobile productions.

The automotive industry is a key industry for the German economy. One in every five cars worldwide carries a German brand, cars and auto parts account for roughly one fifth of all German exports, Germany is home to more than 40 automobile assembly and engine production plants, and the sector employs over 800,000 people (some 2% of total employment). However, given that many suppliers for the automotive industry are SMEs and often located in rural areas, the indirect employment effect could two to three times higher. Just think of the infrastructure of entire villages or regions hosting automotive suppliers. In terms of gross added-value, the automotive industry accounts for roughly 9% of industrial activity; significant but clearly not the sole destiny for the entire economy.

Looking ahead, low inventories and stronger new orders bode well for industrial production in the coming months. On Friday, June new orders were reported with a increase of 1.0% MoM (5.1% YoY). New orders have now increased in four out of the first six months of the year. Also, strong confidence indicators point to continued strong activity as well.

As unexpected as today’s drop in industrial production has been, the German economy is still on track to post another strong quarter. Given the sound fundamentals, a month of weaker industrial data should only be like a rain shower on hot and humid summer day: a welcome refresher.