Germany: Industrial production contracts more than expected in September
September industrial production data did little to diminish fears of a technical recession in Germany. At the close of the third quarter, industrial output fell 0.6% on a seasonally-adjusted month-on-month basis, contrasting the upwardly revised 0.4% expansion in August (previously reported: +0.3% month-on-month) and worse than the 0.4% contraction expected by market analysts.
The dismal print was driven by a contraction in manufacturing production. The goods-producing sector was likely held hostage by a hostile external environment due to protracted Sino-American trade tensions and a still-uncertain Brexit outcome. Production of intermediate goods and capital goods dropped sharply in the month, while consumer goods production fell notably too. More positively, energy production and activity in the construction sector rose robustly; however, this was not enough to offset contractions in the other subsectors.
Meanwhile, annual industrial production fell 4.3% in September, down from the revised 3.9% drop in August (previously reported: -4.0% year-on-year). Consequently, annual industrial output contracted for the 11th consecutive month. Moreover, in the 12 months up to September, industrial production was down 2.9%, worsening from August’s 2.6% fall.
Reacting to the latest result, Carsten Brzeski, chief economist at ING Germany, stated that “hopes for a quick rebound of German industry were short-lived [as] today’s industrial production data shows that any optimism on the outlook for German industry is premature.”
Dr. Andreas Rees, chief German economist at UniCredit, added that “all so far available hard data for the third quarter points towards a GDP reading which was flat or declined somewhat.” Rees continued to state that: “there are no early warning signals of a crash. Domestic demand in the form of private consumer expenditures is likely to stabilize the German economy. Recently, forward-looking business sentiment has also increased somewhat.” This sentiment was echoed by Brzeski, who noted that “so far, we only know that industry is in recession but not necessarily the entire economy. As so often, it will be the export sector, which decides the fate of the German economy.”
The outlook for the German industrial sector and the wider economy remains cloaked in uncertainty as clouds are brewing over the horizon. External risks have begun to show signs of spilling over into the domestic economy; the labor market is starting to feel the pinch from the economic slowdown, as jobs are shed in the manufacturing sector. Moreover, the decision by the World Trade Organization to allow the U.S. to impose tariffs on European goods—which the Trump administration subsequently did—and potential American tariffs on European cars—on which a decision is expected on 13 November—pose serious downside risks to the export-oriented German economy.