German economy not at full speed (yet)

Bag of mixed data. German industrial production struggled to gain further momentum in February, increasing by only 0.2% MoM. The 0.6% increase in January was revised downwards to a drop by 0.4% MoM. On the year, industrial production is down by 0.3%. The meagre increase in industrial production is mainly the result of a reversal of weather-related strong activity in the construction sector in January. The increase of activity in manufacturing (0.5% MoM) and capital goods (1.2% MoM) shows that the German industry has currently more momentum than suggested by headline numbers. At the same time, the statistical office also released latest trade data. Exports increased by 1.5% MoM in February, from a 2.1% drop in January. As imports increased by 1.8% MoM, the seasonally-adusted trade balance remained unchanged at 19.6 bn euro. Today’s trade data will do little to hush the international dispute on Germany’s high current account surplus. The country’s trade balance is moving from one record high to another. While the criticism of too few domestic investments is clearly justified, it is useful to remember that – at least in the German economy – external and internal activities have hardly ever been two sides of the same coin. It is far from uncertain that more domestic activity, be it consumption or investment, would automatically lead to a significant reduction of the trade surplus. In fact, last year’s growth performance already showed that solid domestic demand can go hand in hand with net export growth. Despite ongoing geopolitical tensions and Eurozone weakness, net exports contributed positively to German growth in three out of four quarters last year, while at the same time, private consumption grew at more than double the pace of the fifteen years before. Looking ahead, both the domestic and the external part of the German economy look set for further improvement. On the back of record high employment, low unemployment, higher wages, low interest rates and low inflation, private consumption should gain further momentum. At the same time, confidence indicators and order books send encouraging signals for growth of industrial production in the coming months, even after yesterday’s rather disappointing new orders data. Only the fact that inventories have remained unchanged in recent months provides some note of caution. The most encouraging signal, for the German industry comes from the weaker euro. Judging from earlier episodes with similar exchange rate weakness, order books are currently only moderately filled. If past performances are any guide for the future, German exporters can start rubbing their hands. Today’s data are good but not as good as buoyant confidence indicators had suggested in recent weeks. At its current level, industrial production only points to meagre growth in the first quarter. However, as there is still more good news in the pipeline, there is no need to doubt the Spring revival of the German economy (yet).