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German industrial output drops but economy primed for fourth quarter rebound

By Michael Nienaber

By Michael Nienaber

BERLIN (Reuters) - German industrial production fell at its fastest rate in more than two years in September as growth shifted into a lower gear during an uncertain summer for manufacturers, though the economy looked primed for a fourth-quarter rebound.

Monthly output dropped a bigger-than-expected 1.8 percent and, as factories flatlined, rose just 0.3 percent in the third quarter overall, Economy Ministry figures showed on Tuesday.

Traditionally the main growth driver of Europe's biggest economy, manufacturing has taken more of a back seat in the past two years as domestic demand has picked up and German firms have faced increased competition from emerging economies.


A fraught political backdrop was added to the mix in the third quarter, when domestic and foreign demand fell for the equipment and other capital goods businesses buy when they make new investments, the data showed.

"The uncertain outcome of the U.S. elections, the unclear Brexit process and artificial growth drivers such as low interest rates are reasons enough for insecurity in the private sector," Anton Boerner, the head of Germany's BGA trade association, said of Tuesday's numbers.

Helped by a consumer boom and higher state spending - driven by a rising tax take from steadily falling unemployment and partly in response to a huge influx of migrants in the past 18 months - Germany's economy grew 0.7 percent in the first quarter and 0.4 percent in the second.

Unicredit economist Andreas Rees said the industrial output figures, along with other data, pointed to a slowdown in quarterly GDP growth to 0.3 percent in the third, for which preliminary data is due next Tuesday.


The September industrial output drop, the biggest since August 2014, was in part a reflection of the previous month's strong rebound of 3.0 percent.

It also masked a strong performance in certain sectors, notably construction, in which the economy ministry said high order levels pointed to "a certain revival" in manufacturing in coming months.

Supporting that prediction, the ZDB construction association on Tuesday raised its sales forecast for 2016, citing a real estate building boom and higher state infrastructure spending.

More growth in consumer spending also looked likely as the HDE retail association said it expected sales over the Christmas period to rise 3.9 percent to top 90 billion euros ($99.5 billion) for the first time.

Suggesting initial concerns about the impact of June's Brexit vote may have been overdone, morale among German company executives hit its highest level in 2-1/2 years in October, according to the Ifo business climate index published two weeks ago.

Also supporting expectations of a solid fourth quarter for the economy, Friday's purchasing managers survey from Markit showed the private sector expanded at its second-fastest monthly rate this year in October.

"The (economic) outlook is better than today's figures," concluded Nordea economist Holger Sandte.

A rebound in the final quarter would keep the economy on course to meet the government's forecast of 1.8 percent growth in 2016, which would be the strongest in five years.

But Bankhaus Lampe's Krueger added a note of caution.

"Compared to the high levels seen in some sentiment indicators, the support for overall economic growth is still limited," he said.

Trade data on Tuesday from the Federal Statistics Office was also relatively downbeat, showing adjusted exports fell by 0.7 percent and imports by 0.5 percent in September.

That narrowed the trade surplus to 21.3 billion euros ($23.6 billion), below the Reuters consensus forecast of 23.0 billion euros and also less than August's revised 21.6 billion.

"There now is a question mark behind our forecast for export growth of 2.0 percent this year," DIHK trade analyst Volker Treier said.

(Reporting by Michael Nienaber; Editing by John Stonestreet)