Latest official data reflect grim tidings of independent reports that said business conditions were less rosy than painted, reports Team IFM

Wiesbaden, July 10, 2014: Germany, the Euro zone’s largest economy, saw its industrial production go down at its quickest clip in two years in May, challenging government claims that the economy was fast on the way to recovery and bolstering the view of sceptics that this wasn’t so.

The data was also in line with the findings of an independent survey done by economy tracker Markit, which said output growth in Germany’s manufacturing sector eased to a nine-month low in June, spelling deep trouble for the entire Euro area.

According to provisional data of the Federal Statistical Office or Destatis released on Monday, production in industry was down 1.8 percent in May from the previous month on a price, seasonally and working day adjusted basis.

The latest data showed that in April 2014, industrial production decreased a revised 0.3 percent from March, while that excluding energy and construction decreased 1.6 percent. Energy production was up one percent while the production in construction decreased by 4.9 percent in May from the preceding month.

Within industry, it said, the production of intermediate goods and consumer goods decreased by 3 percent and 3.5 percent. Producers of capital goods, however, reported a slight increase of 0.3 percent on the previous month.

“After a strong first quarter, production has temporarily weakened in recent months,” Destatis said, but struck a hopeful note saying that the sector is likely to rebound later this year after a weak second quarter.

Like Destatis, ING Bank economist Carsten Brzeski too was not overly worried by the latest data. “The overall level of industrial activity is still strong,” Brzeski told The Wall Street Journal. “And the safety net for the German industry, richly filled order books and low inventories, is still boding well for the coming months,” he noted.

Earlier, Destatis had said in a May 23 statement after it released its first quarter GDP assessment report that “the German economy is gaining momentum,” and maintained that one of the reasons for the “strong growth at the beginning of the year” was the extremely mild weather.

Destatis said its finding was consistent with its May 15 preliminary report that put the first quarter GDP nosing up 0.8 percent upon seasonal adjustments, compared with the October-December period of 2013.

“The last time GDP grew more in a quarter-on-quarter comparison was three years ago,” the statistical office said. “The moderate growth path of last year (of 0.4 percent in the last quarter of 2013) thus has accelerated.”

But a warning note was struck by Markit in its June report on Germany’s manufacturing sector. “June’s survey results pointed to slower growth in Germany’s goods producing sector with the headline PMI falling to an eight-month low,” said Oliver Kolodseike, economist and author of the report.

ALARM BELLS

In the report released on July 1, Markit said German output growth eased to a nine-month low last month, while its PMI – the index for gauging sectoral health – dropped to an eight-month low of 52 as output growth fell and new orders rose at the weakest rate in almost one year.

Alongside, employment stagnated, ending a six-month sequence of growth, Markit said, adding, “The latest improvement was the weakest since October last year.”

It said German manufacturers commented on “production adjustments” after reporting solid growth at the beginning of the year. Sector data suggested that production rose at intermediate and investment goods producers, but stagnated at consumer goods manufacturers.

While output has now increased for 14 successive months, Markit said the latest rise was the weakest since September last year, and order intakes expanded at the slowest pace in nearly one year.

The increase in client demand from foreign markets was slower, with the pace of expansion easing only marginally, the weakest since a fall was recorded in July last year. “Where panelists reported higher new export orders, they mentioned China as a source of growth,” the report noted.

With order intakes rising at a slower pace, German manufacturers lowered their purchasing activity for the first time in one year. The rate of decline was, however, only marginal.

Employment in Germany’s goods producing sector was broadly stagnant since the previous month, ending a six-month spell of increasing workforce numbers. However, the backlog of work accumulated only marginally, following a month of falling work-in-hand.

Markit said German manufacturers remained cautious about inventory levels, highlighted by a fall in both stocks of purchases and finished goods. Suppliers’ delivery times lengthened to the greatest extent since January.

“Client demand from foreign markets rose to the weakest extent in the current spell of growth, suggesting that a relatively strong Euro is acting as a drag on stronger export growth and may continue to do so in the coming months,” said Markit economist Kolodseike.

SCEPTICAL NOTE

Earlier, a closely watched survey by one of Germany’s largest economic think-tanks, the Munich -based Ifo Institute for Economic Research, had said German business confidence had dipped in May.

The report, released a few hours after Destatis announced its first quarter data on May 23, said German companies were less optimistic about both their current situation and the outlook for the next six months.

“Assessments of the current business situation were no longer as favorable as in April,” said Hans-Werner Sinn, President of Ifo Institute, in a statement. “A lull was seen in the German economy in May,” he said.

The Ifo report, based on monthly responses from about 7,000 companies, painted a slightly less upbeat picture of the German economic scenario than that of the Destatis assessment, saying its Business Climate Index for industry and trade had slipped to 110.4 points in May from 111.2 points in April. In short, German businesses were an unsure lot in May.

According to Sinn, a lull was seen in the German economy in the month under review. “Companies are also less optimistic about future business developments,” he said in the institute’s statement.

The statement also said the business climate index fell slightly, but was still at a “high level” in the manufacturing sector.

In wholesaling, however, the business climate index fell markedly after April’s sharp increase, Ifo said. Assessments of the current business situation were “clearly less favorable” while that of the business outlook deteriorated “only marginally”.

“Although assessments of the current business situation improved marginally, manufacturers are slightly less optimistic about future business developments,” Sinn said. “Manufacturers continue to expect stronger impulses from exports.”