Last updated: November 7, 2012 3:00 pm

Weak German data point to stagnation

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A month-on-month fall in German industrial output, driven by a weakening manufacturing sector, and a sharp cut in European Commission growth forecasts on Wednesday exacerbated fears that the eurozone’s biggest economy is slipping closer to stagnation.

The seasonally adjusted 1.8 per cent month-on-month fall in industrial production was worse than expected and followed other data published by the German economy ministry on Tuesday that showed factory orders fell 3.3 per cent in September.

In Brussels, the European Commission halved its 2013 growth forecast for Germany, citing the sovereign debt crisis and weaker export demand. It now expects German gross domestic product to grow 0.8 per cent next year, down from a previous forecast of 1.7 per cent. The German government last month cut its own 2013 growth forecast to 1 per cent.

“Germany has so far been largely insulated from some of the difficulties elsewhere in the euro area,” Mario Draghi, president of the European Central Bank, said in a speech in Frankfurt.

“But the latest data suggest that these developments are now starting to affect the German economy,” he said after describing eurozone unemployment as “deplorably high” and the economic outlook as “weak.”

On a quarterly basis, German industrial production still grew by 0.7 per cent in the third quarter, the economy ministry data showed. However, it follows increasingly gloomy business sentiment surveys and comments from German industrialists that may indicate steeper falls ahead.

“The German decoupling from the rest of the eurozone has come to an end,” Carsten Brzeski, economist at ING, said in a note. “Strong trading ties with non-eurozone countries had shielded the economy from the euro crisis. Now, with the global economic cooling in the second half of the year, this immunity is quickly fading away.”

Illustrating jitters among manufacturers, BMW, the carmaker, said on Tuesday it “was beginning to feel some headwind”, even though the luxury sector it operates in has been more shielded from the slowdown than the mass market and it is still recording buoyant sales in China.

Jonathan Loynes, economist at Capital Economics, said the September industrial production figures “poured cold water on recent talk of recovery in the eurozone’s biggest economy”.

The data come on the eve of a meeting by the ECB’s interest rate-setting governing council. While many analysts believe the bank is likely to cut its headline refinancing rate from 0.75 per cent in coming months, there is broad consensus that it is likely to hold off from doing so this month as it gauges the effect of its new, and so far untested, bond-buying programme aimed at combating speculation of a eurozone break-up.

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