German industry defies higher energy prices and low water levels – For now

Carsten Brzeski ING Economic and Financial Analysis

Still holding up. Despite higher energy prices and low summer water levels, German industrial production has remained resilient, growing for the second month in a row. In September, industrial production rose by 0.7% month-on-month, following a 2.0% increase in August, and was 0.4% higher than a year earlier.

The September increase seems to be a post-summer rebound, as production in the automotive and construction sectors surged. Both sectors continue to face structural headwinds, whether from Chinese competition or higher interest rates. For now, September’s strength is therefore better seen as a post-holiday bounce rather than evidence of a lasting improvement in German industry.

Nevertheless, today’s numbers illustrate that, at least up to now, supply chain disruptions on the back of the war in the Middle East and low water levels this summer have done less harm to German industry than feared. However, past success is no guarantee of future success. The fact that, compared with the second quarter, industrial production actually dropped in the third quarter strengthens this warning.

Let’s also not forget that there still is a long list of potential downside risks for German industry, the main ones being high energy prices and higher interest rates. Yesterday’s increase in new orders and the slight drop in inventories, however, still point to moderate industrial production growth in the nearer term.

All in all, this morning’s industrial production data is both a sign of strength and weakness. Of strength, as industry defied some severe headwinds in the third quarter, but also weakness, as the momentum of the second quarter has clearly faded. It’s a gradual rebound but still a far cry from being a substantial recovery.

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Author

Carsten Brzeski

ING Economic and Financial Analysis

Carsten Brzeski is Chief Economist in Germany. He covers economic and political developments in Germany and the Eurozone, including the monetary policy of the ECB.

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