Oct 7, 2014 7:23 AM

German economic outlook dims as industry slides

The Associated Press

BERLIN (AP) Concerns are growing that Germany's economy may not rebound as expected in the third quarter, weighing on the already-fragile eurozone, after data Tuesday showed the biggest monthly drop in industrial production in five years.

The 4 percent drop in industrial output in August was far bigger than the 1.5 percent decline expected in markets and the sharpest slide since early 2009. It follows a string of other weak data a 5.7 percent monthly decline in factory orders in August, led by falling demand for Germany's exports, as well as a drop in business confidence indicators since the spring.

The data has analysts saying that Europe's largest economy might not recover from a weak second quarter as hoped an outcome that bodes ill for the broader 18-country eurozone.

Germany, which relies heavily on its industrial sector and high-value exports, is suffering from weak demand for its goods from the rest of Europe and China, where growth is also slowing. It is also getting hit by fears over the potential economic impact of the sanctions on Russia triggered by the crisis in Ukraine.

Andreas Rees, chief German economist at UniCredit, said Germany's third quarter rebound "is now at risk." He warned, however, that there was no reason to panic and did not expect Germany to fall into a new recession.

The European Central Bank has stepped up its economic stimulus in an effort to keep the eurozone economy from sliding into reverse after four quarters of meager recovery from a crisis over high debt in several member countries. The ECB has cut its key interest rate as far as it can, to a record low 0.05 percent, offered cheap loans to banks, and announced plans to buy bundles of bank loans all steps aimed at getting credit moving to businesses so they can expand.

Several economists still expect the German economy to grow in the third quarter after a 0.2 percent contraction in the second quarter. Strong demand from consumers at home can help offset weaker exports, they said.

Among other reasons for hope is that a one-time calendar factor the timing of summer vacations contributed to the big drop in industrial production in August, the Economy Ministry said Tuesday. Rees said that meant a simultaneous shutdown of auto plants that contributed 2.9 percentage points of the 4 percent drop. That sets up auto production for a rebound in September.

But analyst Carsten Brzeski at ING said the drop was too strong to be entirely explained by the seasonal factor.

"The short-term outlook for the economy is very diffuse as the strong labor market and solid private consumption should be able to, at least partly, offset weaker industrial activity," he wrote in a research note.

"Whether this will be enough to avoid a technical recession, i.e., another contraction in the third quarter, is with today's industrial production numbers too early to tell. "


McHugh contributed from Frankfurt, Germany.


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