German industrial output drops unexpectedly in November

German industrial production unexpectedly fell in November, the federal statistics office said on Tuesday, marking the sixth monthly decline in a row.

Industrial production decreased in November by 0.7 per cent compared to the previous month. Analysts polled by Reuters had predicted a 0.2 per cent rise.

“The unexpected fall in German industrial production in November shows that companies are increasingly reacting to falling order books,” Commerzbank’s chief economist Joerg Kraemer said.

Industrial orders rose by only 0.3 per cent month-on-month in November, the federal statistics office said on Monday.

The decline in output was broad-based. The production of capital goods decreased by 0.7 per cent on the month, the production of intermediate goods fell by 0.5 per cent and that of consumer goods by 0.1 per cent.

Outside manufacturing, there was a 3.9 per cent increase in energy production, while production in construction dropped by 2.9 per cent from the previous month.

“German industry was still in recession last quarter,” said Melanie Debono, senior Europe economist at Pantheon Macroeconomics.

The carry-over - the change in the quarter if overall industrial output had held steady in December - points to a quarterly fall in industrial production in the fourth quarter of around 1.7 per cent, after a 2 per cent slide in the third quarter, the economist said.

The Purchasing Managers’ Index for manufacturing showed that German manufacturing activity continued to contract in December, pointing to a larger decline of 2 per cent in the fourth quarter, according to Debono.

German industrial weakness appears to be having a knock-on effect in CEE economies linked to the German auto sector. Hungary’s industrial output fell by an annual 5.8 per cent in November and Czech industrial output dropped by 2.7 per cent year-on-year in November.

The German statistics office revised data for October to show a 0.3 per cent decline in industrial output on the month, instead of a 0.4 per cent drop.

The less volatile three-month on three-month comparison showed that production was 1.9 per cent lower in the period from September to November than in the previous three months, the office said.

Industrial production is now more than 9 per cent below its pre-pandemic level, almost four years since the start of COVID-19, said Carsten Brzeski, global head of macro at ING.

The near-term outlook for German industry gives little reason for optimism.

“With a soft or hard landing of the U.S. economy and still very little positive growth momentum in China, external demand for German industrial production is likely to remain weak,” Brzeski said.

Consumption also remains weak. German retail sales fell more than expected in November, decreasing by 2.5 per cent compared with the previous month, data showed on Friday.

If both industry and consumers fail to contribute to growth, Europe’s largest economy is likely to face a new recession, said Thomas Gitzel, chief economist at VP Bank.

“The combination of high inflation and interest rates with a simultaneously weak global economy is a toxic cocktail that can ultimately only lead to a recession,” Gitzel said.

In the third quarter, gross domestic product fell by 0.1 per cent and if it falls again in the final quarter of 2023, there will two consecutive quarters of negative growth, which is defined as a technical recession.

“December is likely to bring more negative surprises, with the first signs of economic fallout from the government’s fiscal woes, disruptions in the Suez Canal and reportedly weak Christmas sales,” Brzeski from ING said, adding that all of this points to another small contraction in the fourth quarter.