Europe Economy

'There is something brewing' in Germany: Fears of recession after latest industrial data

Key Points
  • Another set of dismal industrial data from Germany has raised concerns over Germany's economy.
  • German industrial production declined 1.9 percent month-on-month in November, coming in way below a consensus for growth of 0.3 percent.
  • Germany's statistics office publishes preliminary GDP data for the fourth quarter and 2018 next week.
Heavy traffic on Friedrichstraße, Berlin
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Another set of dismal industrial data from Germany has raised concerns among analysts that Europe's largest economy could have contracted in the fourth quarter of 2018.

German industrial production declined 1.9 percent month-on-month in November, coming in way below a consensus for growth of 0.3 percent.

"The very bad run is continuing and it is now possible that German gross domestic product (GDP) stagnated in the fourth quarter of 2018," J.P.Morgan economist Greg Fuzesi said in a note Tuesday. "Of course, the German industrial production data are very noisy, but even with a big rebound in December, it is no longer possible to rule out even a small GDP contraction in the fourth quarter of 2018."

Weakness was widespread across industry, the preliminary data from Germany's federal statistics office Destatis showed Tuesday, with declines in output seen in the auto, energy and construction industry.

The latest industrial production numbers marked the third consecutive fall in the country's production numbers and concerns over economic growth. In October, industrial production fell 0.8 percent on the previous month.


Economists will be watching closely when Germany's statistics office publishes preliminary GDP data for 2018 (on January 15) and fourth quarter in February.

In the third quarter, German growth fell 0.2 percent from the previous quarter. Technically, a recession is when there is two consecutive quarters of economic contraction. Foreign trade data released on Wednesday this week will also give an indication on how Germany is faring against a backdrop of global trade tensions between the U.S. and China, Brexit and economic uncertainty in the euro zone.

The German government cut its economic growth forecast for 2018 in December with Economy Minister Peter Altmaier predicting growth of 1.5 to 1.6 percent in 2018, down from a previous forecast of 1.8 percent.

"Both the latest hard and soft data coming from the German industrial sector have been so surprisingly weak that they also convey a fundamental message. In our view, there is something brewing, probably triggered by less dynamic global trade," Andreas Rees, chief German economist at UniCredit, said in a note Tuesday.

He agreed that the fourth quarter GDP data is "likely to be far weaker than expected" and that a stagnation in overall economic activity in the fourth quarter of 2018 "cannot be excluded."

Possible triggers for softness in the data could be the ongoing trade tensions, the uncertainty about Brexit, the slowdown in China and the latest stock market turbulence which may acted as an additional dampener on business sentiment. Germany's DAX had its worst year in a decade in 2018 amid persistent market volatility across the globe. The index had fallen 18 percent from the start of 2018 and briefly fell into bear market territory (when stocks see a 20 percent decline or more from a recent high) in December.

Two technical factors could have affected the latest industrial production data, however, including the fact that there were a lower number of available working days in November due to the timing of public holidays.

Secondly, "a strong rebound in car production has still not kicked in according to the latest November data," Rees said, caused by the working-day effect but also by the ongoing problems of switching to a new car emission testing regime.

UniCredit's Rees said that given the rising likelihood of a weak fourth quarter, "the performance in 2019 could also be less dynamic than assumed, even if one pencils in the expected delayed rebound."

Not all lost

Economists agree that there will be a rebound in the German car sector, a key driver of German economic growth. The sector was hit by the diesel emissions scandal that emerged in late 2015.

Nonetheless, Chief Economist at ING Carsten Brzeski said in a note Tuesday "there is more to it than just cars."

"Weaker German industrial production is not only the result of problems in the automotive sector. In fact, the last significant quarterly surge in industrial production dates back to the fourth quarter of 2017. Since then, industrial production has been treading water," he said.

Brzeski believed a recession should be nothing to be too worried about. "It should be technical, without any significant marks on the labor market. In fact, there are still plenty of reasons to remain optimistic, even for German industry: despite the recent deflation of new orders, order books are still richly filled and companies still report assured production close to record highs," he said.

"In addition to this, the recent pick-up in orders in the automotive industry and favorable financing conditions in the entire economy also bode well for at least solid industrial and investment activity in 2019."