Euro Supported by Signs Germany's Industrial "Dry Spell" is Ending

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- Euro is best performing major currency

- German Firms look to rebuild inventories

- Export data disappoints

Euro exchange rates advanced Thursday following the release of data that shows the decline in Germany's industrial sector might be ending, paving the way for a potential recovery for the Eurozone's industrial heart in 2020.

German industrial production for November rose 1.1% month-on-month, markets were positioned for a reading of 0.7%, and it is therefore understandable why the beating of expectations has helped the Euro advance:

Above: The Euro advanced against all major currencies in the wake of better-than-expected German data.

The Euro-to-Dollar exchange rate has risen to trade at 1.1118 while the Euro-to-Pound exchange rate has risen a quarter of a percent to trade at 0.8498.

"The latest November reading for industrial production is not the start of further strong rises in industrial production in the next few months. However, and instead, it probably signals the gradual bottoming out of the sustained dry spell in German industrial activity," says Dr. Andreas Rees, Chief German Economist at UniCredit Bank in Frankfurt.

Image courtesy of Pantheon Macroeconomics

"The rate of decline appears to be stabilising, though, allowing for a gradual pick-up in the quarter-on-quarter rates," says Claus Vistesen, Chief Eurozone Economist at Pantheon Macroeconomics.

While the headline industrial production figures proved supportive for the Euro, other data was less convincing and is why economists are not yet ready to call a turnaround in fortunes for German manufacutring and industrial production, which entered a recession in 2019.

German exports for November fell 2.3%, whereas markets were only expecting a reading of -0.5%. The German trade balance meanwhile showed a surplus €18BN, where markets ere looking for €20BN.

The trade statistics suggest that external demand for Germany's industrial products is yet to show signs of recovery, drawing questions on the sustainability of the rise in industrial production; we have a situation where industrial production is up, yet exports are down. Germany is a major exporter of industrial products, and the slowdown in global trade in 2019 has understandably been deemed to be one of the main culpritys behind the industrial recession.

"The latest German industrial activity data seem to be rather confusing than providing any clear-cut empirical evidence. Industrial production increased significantly in November, while exports declined even more strongly," notes Rees.

Rees says the reason for this apparent contradiction is because German factories appear to be rebuilding their inventory levels which have been whittled down over recent months. He notes that in October data showed a decent pick up in exports, but a slip in industrial production.

Rees says inventory changes are "acting as a link and bridging the gap between production and exports."

"On a positive note, there are some tentative signs of stabilisation in global trade and hence German exports," adds Rees.

Judging by the tentative pickup in the Euro exchange rate complex, it appears markets are also taking the positives away from today's data and sensing some improvement in German industrial performance over coming months.

Key to Germany's industrial outlook will be the impact of the U.S.-China Phase One trade deal reached in December, and whether this will lift activity not only in China but across the globe. Only when global demand for German industrial goods starts to grow once more will a sustainable pickup in activity be recorded.

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