German industry shows tentative signs of life

German industrial production increased by 1.3% month-on-month in September, from the severe, though slightly revised, August plunge of -3.7% MoM. As much as we applaud any positive macro news coming out of Germany these days, don’t mistake a cyclical rebound for a structural improvement.

German industry remains in anything but a good place. As illustrated, for example, by the fact that on the year, industrial production was still down by 1% and production in energy-intensive industries is also still slightly negative compared with a year ago.

Today’s rebound does not come as a surprise. It is the expected rebound after a devastating August reading, which in turn was partly driven by one-off factors like the summer holidays and changes in production facilities in the automotive industry. According to the statistical office, the September rebound was driven by production in the automotive and electronics industries, while production in manufacturing dropped. After three good months, activity in the construction sector weakened, dropping by 0.9% MoM. To be clear, no single monthly data reading could currently signal a turning point – this would require a longer series of positive data.

Looking ahead, German industry will oscillate between some cyclical relief and continued structural weakness. On a more positive note, production expectations have started to increase again, industrial orders rebounded in September, inventories have come down somewhat and public orders for defence and infrastructure should support production. At the same time, however, US tariffs, Chinese competition, reluctance to invest and capacity utilisation at the low levels last seen during the financial crisis argue against any premature optimism.

In short, today’s industrial production data shows weak signs of life. Over the coming months, industrial production should show very tentative improvements. However, any of these improvements will be of a cyclical nature, coming from very low levels, and should not be mistaken for structural improvements.