MNI 5 THINGS: German IP Declines Further In August

- MNI's against consensus forecast correctly called for a further contraction

By Jaspreet Sehmi

     LONDON (MNI) - Germany's industrial slowdown extended into August, data

released this morning by the German Federal Statistical Office reveals. We

summarise key takeaways in the following five points.

     Overview: Industrial production declined by 0.3% m/m in August, leaving the

y/y rate at -0.1%. While analyst estimates were mixed, most were pencilling in a

gain of around 0.4%, following a drop of 1.3% m/m in July (downwardly revised

from -1.1%). Data released last week showing a healthy rebound in August factory

orders (2.0% m/m following drops of 0.9% in July and 3.9% in June) had fuelled

expectations of a similar recovery in production. However, as we discuss below,

orders tend to be a leading rather than coincident indicator of output.

     MNI's Against Consensus Forecast Correctly Projected Further Decline: In

its preview of today's data, MNI outlined its recent regression analysis looking

into the relationship between industrial orders and production. This correctly

pointed to a further decline in industrial production in August, contrary to

consensus projections for a rebound. While orders saw an uptick in August, the

relationship between the two variables tends to be lagged, with our analysis

suggesting that orders (lagged by three months) are a strong predictor of

industrial production. So a further drop in output in August is unsurprising

given the protracted period of falling orders seen earlier this year. It remains

to be seen whether August's orders bounce will be sustained and help to support

more robust output going forward.

     Production Remains At Historically Healthy Levels: While the 3-month

rolling average has ticked lower, it continues to point to a healthy level of

industrial production. At least some of the decline that we have seen so far

this year is simply a correction from strong - and unsustainable - growth rates

in 2017.

     Sectoral Breakdown: Details of the data reveal a mixed picture. Energy and

construction, the only sectors to see gains in July, saw a divergent performance

in August. While energy output increased for a fourth consecutive month, the

construction sector more than reversed July's gains with a 1.8% m/m drop. Core

industrial production, which strips out the traditionally volatile energy and

construction sectors, fell by 0.1% on the month. In terms of the components,

output of intermediate and consumer goods rose by 0.1% m/m and 1.4% m/m

respectively, while capital goods production declined for a third successive

month (by 0.7%).

     German Industry Firmly Settled Into Lower Gear, But Reasons For Optimism

Ahead: Given the backdrop of slowing global demand, German industrial activity

will continue to undershoot the robust rates of growth it recorded in 2017.

Nevertheless, a number of factors point to a rebound in output in the coming

months. These include the resurgence of orders in August, as well as elevated

levels of order backlogs. In addition, anecdotal survey evidence is encouraging.

The Ifo manufacturing sub-index suggests that confidence in the sector is still

relatively strong, while the manufacturing PMI continues to point to production

gains ahead. The still highly accommodative stance of monetary policy and recent

depreciation of the euro are also supportive factors.

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

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