'Scary' German output figures propel recession fears

German industrial output fell more than expected in June, driven by weaker production of intermediate and capital goods, adding to signs that Europe’s biggest economy contracted in the second quarter as its exporters get caught in trade disputes.

Industrial output dropped by 1.5% on the month - a far steeper decline than the 0.4% fall that had been forecast, figures released by the Statistics Office showed on Wednesday.

“The continued plunge in production is scary,” Bankhaus Lampe economist Alexander Krueger said, adding that a recession in the manufacturing sector was likely to continue due to the escalation of the trade dispute between China and the United States.

Both countries are important export destinations for German companies, which means that the tit-for-tat tariff dispute between the world’s two largest economies is also having a disproportionately large impact on Germany.

“The longer this continues, the more likely it is that other sectors of the economy will be dragged into this. Growth forecasts for Germany are likely to be trimmed further,” Krueger said.

In the second quarter as a whole, industrial output fell by 1.8% on the quarter, driven by steep drops in metal production, machinery and car manufacturing, the economy ministry said.

“Industry remains in an economic downturn,” the ministry said. Production in construction fell 1.1% in the second quarter while energy output dropped 5.9% in the same period.

PRELUDE TO RECESSION

The figures came after German industrial orders on Tuesday exceeded expectations in June, but the economy ministry cautioned that this sector of the economy had not yet reached a turning point.

“This supports our expectation that the German real GDP shrank slightly in the second quarter,” Commerzbank economist Ralph Solveen said on the industrial output figures.

“Despite the increase in orders reported yesterday, the downward trend in production is likely to continue in the coming months, so that manufacturing remains the weak spot of the German economy.”

The German economy is widely expected to have at best stagnated in the second quarter, and sentiment indicators suggest it could shrink in the third as exporters are hit by trade disputes, Brexit uncertainty, and a slowing world economy.

The German government expects the economy to grow by a meager 0.5% this year and rebound with a 1.5% expansion in 2020.

Andreas Scheuerle from DekaBank said the industrial data suggested the economy contracted by 0.2% in the second quarter after expanding by 0.4% in the first three months of the year.

“We assume that this is the prelude to a technical recession,” Scheuerle added. A technical recession is normally defined as at least two-quarters of contraction in a row.

The Federal Statistics Office will release preliminary gross domestic product figures for the April-June period next Wednesday.