MNI 5 THINGS: German Industry Stumbles Into Q3

--Decline in July industrial production comes as no surprise.

By Jaspreet Sehmi

     LONDON (MNI) - Germany's industrial sector has kicked off the third quarter

in feeble fashion. Unsurprisingly after yesterday's poor factory orders print,

data released this morning by the German Federal Statistical Office showed a

contraction in July industrial production. We summarise the key takeaways in the

following five points.

     Overview: Industrial production declined by 1.1% m/m in July, leaving the

y/y rate at +1.1%. Analysts had pencilled in a small rebound (0.2% m/m),

although forecasts were probably downgraded following a weaker-than-expected

factory orders release on Thursday. The monthly drop in output was steeper than

in June (revised up to -0.7% from an originally reported -0.9%), but a 2.3% rise

in April meant that the 3-month rolling average level of orders ticked slightly

higher, as production remains far above both series and recent averages.

     Unusual Divergence Between Headline & Core IP Reflects Surging Construction

& Weak Exports: Construction output rose by 2.6% m/m in July, the strongest pace

of growth in seventeen months, and limiting the overall decline in headline

industrial output. Core industrial production, however, which strips out the

traditionally volatile energy and construction sectors, fell by 1.9% on the

month - 0.8pp more than the headline drop. German goods exports fell by 0.9%, as

trade tensions make themselves felt in the numbers.

     Sectoral Breakdown: Details of the data reveal across-the-board weakness,

barring the rise in construction. Investment goods production declined most

sharply (by 2.5% m/m). Firms' investment appetite has been dented by concerns

over further U.S. protectionist measures. While we expect these concerns to

continue to cause hesitation over investment plans, increasingly binding

manufacturing sector capacity constraints should see the production of

investment goods start to tick higher in the coming months.

     July's Weak Industrial Sector Performance Unlikely To Mark Beginning Of A

More Worrying Downturn: Germany's economics ministry pointed out that "temporary

bottlenecks" in the approval of new passenger cars due to new emissions testing

procedures were at least partly responsible for July's weak industrial

performance. Nevertheless, the decline in both orders and industrial production

is undoubtedly disappointing, particularly given the strength displayed by

recent survey data. And while the balance of risks has turned more negative in

recent weeks - with emerging market woes, renewed protectionist concerns and

Italian budget uncertainty - we remain relatively upbeat on the German (as well

as Eurozone-wide) growth outlook. Germany's economic foundations are healthy.

The labour market is improving, business and consumer confidence are rising,

credit growth is robust, and policy remains supportive amid highly accommodative

monetary conditions and planned fiscal stimulus measures.

     Big Picture: The big picture is that the German economy should continue to

expand at a healthy pace - and support growth in the wider Eurozone - in the

coming quarters. As for policy implications, the weakness in July's data will

not be enough of a concern to prompt the ECB to extend asset purchases beyond

the end of this year, but does back its intention to hold off on rate hikes

until deep into 2019.

--MNI London Bureau; +44 207-862-7489; email: ukeditorial@marketnews.com

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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