German output misses forecast

The August drop indicates outlook for Europe’s largest economy is deteriorating

FRANKFURT: German industrial production fell more than economists forecast in August in the latest sign that the outlook for Europe’s largest economy is deteriorating.

Production, adjusted for seasonal swings, dropped 4% from July, when it expanded 1.6%, the Economy Ministry in Berlin said yesterday. That’s the biggest decline since January 2009 and compares with a median estimate of 1.5% in a Bloomberg News survey.

Germany’s economy is losing steam as sluggish growth in the euro-area, its largest export market, and political tension with Russia weigh on confidence. The European Central Bank (ECB) has enacted unprecedented stimulus to sustain the regional recovery while calling on governments to press ahead with structural reforms.

“Should this weakness in manufacturing intensify, risks of spillovers to domestic demand would increase,” said Evelyn Herrmann, European economist at BNP Paribas SA in London. “Long-lasting high levels of uncertainty could imply that investment decisions are not only postponed, but cancelled.”

The euro was little-changed yesterday and traded at US$1.2656 at 9.19am Frankfurt time. The yield on German 10-year bonds was at 0.9%.

Output of investment goods slumped 8.8% in August and intermediate goods dropped 1.9%, yesterday’s report showed. Consumer goods production fell 0.4% and construction slid 2%. Only energy output rose, climbing 0.3%.

While the volatility of the data was exacerbated by the timing of the German school holidays this year, it still adds to evidence that the economy is losing momentum after shrinking in the second quarter.

Factory orders plunged 5.7% in August, also the most since 2009, the data showed.

GermanmanufacturingshrankinSeptember, with new orders falling at the fastest pace since 2012, according to a survey of purchasing managers. Business confidence as measured by the Ifo research institute fell to the lowest in almost 1½ years, while unemployment increased for a second month.

“The German economy will develop rather weakly in the second half of this year,” said Ralph Solveen, head of economic research at Commerzbank AG in Frankfurt, who forecasts third-quarter gross domestic product will be little-changed.

“And in light of the weak trend in orders, we would not expect a great deal for the final quarter of this year,” Solveen said.

MAN SE, Europe’s third largest truck manufacturer, said on Sept 25 that operating profit, revenue and sales volume at the truck and bus division would be “significantly below” last year’s level, reflecting weaker demand in markets including Europe and Russia.

“The industrial economy is going through a weak phase,” the ministry said in a statement. “The third quarter as a whole is set for soft output.”

The International Monetary Fund is expected to cut its German growth forecasts for this year and next to about 1.5% from 1.9% and 1.7%, respectively, according to Spiegel magazine.

The 18-nation currency region is still on track for a “modest economic expansion in the second half”, even though risks remain on the downside, ECB president Mario Draghi said last week.

The governing council kept interest rates unchanged at record lows and said it will start buying covered bonds and asset-backed securities to support the economy.