German industrial production: Hot or Not?

Hot now, maybe not in six months.

In Germany, industrial production increased 1.7% in August, or 10.7% over the year. The monthly surge beat expectations 3-times over (0.5% on Bloomberg).

According to MarketWatch:

After two rather disappointing months in the German industry, concerns about
fading external demand and the sustainability of the German recovery surfaced.
Today's numbers should hush these concerns. Not only once, but for a longer
period. Looking ahead, all available evidence points to a further strengthening
of the German industry," said Carsten Brzeski, senior economist at ING in Belgium.

To be sure, this report is consistent with a slew of recent German statistics beating expectations: the unemployment rate dropped to a near 20-year low; consumer confidence continues its fearless ascent; annual inflation is on an upward trend (as opposed to a downward one); and factory orders are increasing at an average 2% monthly rate, far above the pre-recessionary average (0.5%).

In contrast, the Ifo business climate survey, which breaks down expected and current conditions, portends a precipitous decline in annual industrial production activity in the next six months (see chart below).

The chart illustrates the 6-month lead of the trend in Ifo expectations index minus the trend in Ifo current index and the annual growth rate of industrial production. The series are highly correlated, and the expectations/current Ifo peaked in February and fell precipitously thereafter. This suggests that the pace of German industrial production should slow markedly in coming months, and possibly turn negative.

This is just one indicator, and may be a truly spectacular bit of data mining on my part. However, as external demand slows, the German economy, with its 46% of GDP export share, is openly exposed to its drag.
Rebecca Wilder