German Manufacturing Production Contracts According to New Data, but Surge in Construction to Keep Economy Supported

Image © Thorsten Schier, Adobe Images

Concerns that the German economy is becoming a risk to the global growth outlook grew on Friday, April 05 after official data showed a contraction in the country's manufacturing sector of 0.2% month-on-month.

The decline comes just 24 hours after German factory orders were shown to have plunged again in February by 4.2% month-on-month, leading commentators to say the "industrial recession in Germany is still deepening."

However, talk of a German "industrial recession" might actually be premature as the headline industrial production number showed growth of 0.7%.

Looking at the details we do however see this growth in industry was spurred almost exclusively by a whopping leap of 6.8% month-on-month in the construction sector.

An unusually cold January, which gave way to a warmer February is most likely to be behind the distortion in construction activity.

Therefore, manufacturing is certainly the 'sick man' of the German economy with the construction and services sector being left to keep the economy out of recession.

"German industry remains an international reason for concern. In fact, what first looked like the result of a series of negative one-off factors has all of a sudden received the flavour of an industrial meltdown," says Carsten Brzeski, Chief Economist ING Germany.

"This morning’s data do not bring relief for industry, only for the economy as total production in the first two months of the year points to positive GDP growth in the first quarter," adds Brzeski.

The performance of the German economy has certainly left economists scratching their heads with factors such as low water levels on the Rhine, Brexit, Turkey and U.S.-Sino trade tensions all coming in for blame.

However, there is speculation that perhaps, there is something more structural at play.

"Sure, there are external headwinds but the slowdown has been too severe to exclusively be justified by Brexit, China and trade. Either there is more and structural weaknesses finally leave their mark on industry or a rebound is still in the offing," says Brzeski.

We will be looking to see if the recent pick-up in sentiment concerning U.S.-China trade relations, and signs of improved demand out of China will play positive for German industry.

If so, then a pick-up towards mid-year is likely.