Carsten Brzeski's blog

Germany: Industrial setback in June but Q2 growth on track

The June drop in industrial production is too small to affect a solid growth performance over the entire second quarter.

German industrial production took a hit in June, dropping by 0.9% MoM, from 2.4% MoM in May. On the year, industrial production was still up by 2.5%. The drop in industrial activity was broadly-based. After three strong months, activity in the construction sector also weakened, declining by 3.2% MoM. At the same time, exports held up relatively well, despite the delayed impact from last year’s euro strengthening and trade tensions, remaining flat in June after a 1.8% MoM increase in May. As imports increased by 1.2% MoM, the seasonally-adjusted trade surplus narrowed to 19.3bn euro, from 20.4bn euro in May.

After yesterday’s disappointing new orders data, speculations about an imminent downswing of the German economy have gained new momentum. Intuitively, weak June data can be associated with trade tensions. However, in our view, this intuition is not so straight-forward. The analysis of the German economy requires more nuances. Here is our take on the state of the economy.

  1. Despite this week’s disappointments, comparing economic activity data with first quarter data still points to solid growth in Q2. Construction, industrial output and consumption should all be growth drivers, not drags, in Q2. Therefore, next week’s GDP data could easily outperform the Eurozone’s 0.3% growth rate.
  2. Looking at bilateral trade data, German exports have gone through a slight structural shift since the start of the year. While the share of German exports to the US is currently lower than in 2017, the share of other Eurozone countries like the Netherlands, Italy or Spain has actually increased.
  3. At least in the short run, weakening demand for German products as illustrated by yesterday’s disappointing new orders data could actually bring some relief. Particularly the manufacturing sector has been suffering from severe supply-side constraints, with capacity utilization at its highest level since early 2008, a high lack of qualified workers and equipment as a limiting factor. Orders books are still richly filled and it would take a while before a protracted decline in demand would show in activity data.
  4. Trade tensions are weighing on sentiment, not on activity. Obviously, trade tensions are the biggest threat to the German economy at the current juncture. Not so much due to tariffs or the possibility of tariffs but simply due to the fact that a potential trade war brings uncertainty and uncertainty brings a delay in investment decisions.

All of this means that reading and understanding the German economy has become more complex. The long series of one-offs explaining the monthly, often highly volatile, ups and downs of German macro data since the start of the year has further complicated things. Just think of the harsh winter weather, strikes, timing of Easter and long weekends. For now, the only thing that is for sure is that the economy has lost its stellar performance but this does not mean at all that it has become an underperformer. Complexity does not mean failure.