MNI 5 THINGS: Mixed Picture For German Industry

By Jaspreet Sehmi

     LONDON (MNI) - Germany's industrial sector got off to a weak start in the

third quarter and August data may not offer much relief. Both factory orders and

industrial production declined for a second consecutive month in July (by 0.9%

m/m and 1.1% m/m respectively). As still-elevated trade tensions weigh on demand

and delay investment plans, there is a risk that this weakness extended into

August.

     Ahead of the release, we highlight five points for your attention:

     Mixed Signals For August: As both factory orders and production data tend

to be volatile on a monthly basis, two consecutive declines in June and July

could suggest the potential for a rebound in August. It is also unusual to see

both series fall simultaneously for three months in a row - the last time they

concurrently declined for more than two consecutive months was in the aftermath

of the global financial crisis, when they both contracted for six months running

between September 2008 and February 2009. However, after sharp rises last year,

both orders and production remain at historically high levels, so further

(measured) declines in August should not be too alarming or surprising.

     Manufacturing PMI Cooling: Germany's manufacturing PMI fell by a full point

in August, albeit registering a still high-reading of 55.9. While the

relationship between the PMI index and industrial production is not consistently

reliable, the recent downtrend in the PMI is certainly indicative of weakening

momentum in the sector, which could translate into further declines in factory

output over the coming months - particularly given that the index slid to a

25-month low in September, with the wider survey indicating a fall in export

sales for the first time in over three years.

     MNI Analysis Suggests IP Could Fall Again: MNI has carried out some

regression analysis to assess the relationship between German industrial orders

and production. A 2013 ECB study

(https://www.ecb.europa.eu/pub/pdf/scpops/ecbocp149.pdf) found that orders

significantly predict production, with a three-month lag identified as offering

the strongest predictive power. Based on these findings, we estimated the August

industrial production outturn based on the historical relationship between

orders (lagged three months) and output using a simple log-log regression (the

model specified in the ECB paper). The result points to a potential further

decline in production in August. However, it should be noted that production

outturns are not fully explained by developments in new orders, with other

factors, such as sentiment levels and order backlogs, also playing a role.

     Demand For Investment Goods Suffering From Ongoing Trade Tensions: A

sectoral breakdown of July's industrial production data showed across-the-board

weakness, barring a rise in construction output. Investment goods production

declined most sharply (by 2.5% m/m). Uncertainty and concern over U.S.

protectionist measures has dented firms' investment appetite, and could weigh on

it in the coming months.

     What Would A Further Decline in Industrial Output Mean For Economic

Growth?: Even if orders and/or production see further declines in August, unless

these are very sharp, we would stick to our projection for Q3 German GDP growth

to come in at or close to the 0.5% q/q registered in Q2. While momentum in the

manufacturing sector has clearly been stymied by external developments, the

domestic picture remains robust. Unemployment is at record lows, sentiment among

both firms and households is rising, credit growth is robust, and policy remains

supportive amid highly accommodative monetary conditions and planned fiscal

stimulus measures.

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

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