Carsten Brzeski's blog

Strong German growth is built on bricks

German industrial production surges on back of strong construction sector

German industry finally returns as a growth engine. No, it’s not a spelling mistake. German industrial production grew by another whopping 2.2% MoM in February, from 2.2% MoM in January. The sharp increase was driven by an production explosion in the construction sector. After two disappointing months due to the cold winter weather, the construction sector grew by 13.6% MoM. On the year, industrial production was up by 2.3%. Except for construction, the strongest monthly increases were recorded in the consumer good sector (+1.4% MOM). At the same time, Germany’s seasonally-adjusted trade surplus widened significantly to 21.1bn euro, the highest level since August 2016, on the back of increasing exports (+0.8% MoM) and weaker imports (-1.6%).

Bilateral trade data shows that Brexit is already leaving its marks on the German economy. While in the first six months of 2016 around 7.5% of all German exports went to the UK, it was only 6.8% in the second half of the year. Still, over the entire year 2016, the UK was still third most important export destination for Germany. Due to economic weakness, France has lost further grounds and the US remained the single most important export destination for the second year in a row. Given that only one third of all German exports go to other Eurozone countries, it is obvious who has been one of the main beneficiaries of the weak euro. In this regards, latest data will do little to undermine the permanent international criticism of Germany’s trade surplus. At the same time, however, the current strength is also the biggest Achilles’ heel for German exports. The Brexit negotiations and a possible further weakening of the Pound Sterling, protectionist measures from the Trump administration and negative growth surprises from China pose a clear risk to the German economy.

Today’s data suggest that industrial production could finally return as a growth engine for the German economy. At least in the first quarter of the year. At the same time, however, capacity utilisation in the industry is still only marginally above its historical average and clearly below the last peak in 2007 and 2008, despite a record long expansion of the German economy. Still, there are first tentative signs indicating that some improvement is in the making as inventories have been reduced over the winter months. Also, the biggest problem and speed limit to the German economy currently seems to be improving only slowly: investment. Equipment as a limiting factor to production is currently regarded as being at its highest level since the beginning of 2014; even though the absolute level is still relatively low, and loans to non-financial corporates have finally started to pick up since the start of 2016, currently growing at almost 3.5% YoY.

All in all, today’s good data bode well for growth in the first quarter and suggest that buoyant soft indicators have been right. Even though the fact that industrial growth is mainly driven by the construction sector and net exports will do little to spark international enthusiasm.