German industry sputters as euro zone crisis weighs

BERLIN Wed Nov 7, 2012 8:33pm IST

General view of a factory of Salzgitter Flachstahl GmbH, a company of steel manufacturer Salzgitter AG in Salzgitter March 11, 2009. REUTERS/Christian Charisius

General view of a factory of Salzgitter Flachstahl GmbH, a company of steel manufacturer Salzgitter AG in Salzgitter March 11, 2009.

Credit: Reuters/Christian Charisius

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BERLIN (Reuters) - German manufacturing, the locomotive of Europe's largest economy, is running out of steam three years into the euro zone debt crisis, which has clobbered orders and output.

Data on Wednesday showed output slid by 1.8 percent on the month in September, more than forecast and the sharpest drop since April. A day earlier, data had shown industrial orders fell 3.3 percent month-on-month in September.

Economic advisers to the government, traditionally known as the "wise men", said Germany's economy would probably hit a low-point this quarter and grow just 0.8 percent this year and next, mirroring forecasts published by the European Commission on Wednesday.

"What's really worrying is the economic development next year," said adviser Lars Feld after the panel handed its annual report to Chancellor Angela Merkel. "The downside risks to our forecast look greater than the upside ones, given current data."

Industry accounts for a third of German gross domestic product (GDP).

Other recent data has shown business sentiment worsening, the private sector contracting, joblessness rising and industrial orders falling at their sharpest rate in a year, though consumer morale has held up and exports have leapt.

"Germany has so far been largely insulated from some of the difficulties elsewhere in the euro area. But the latest data suggest that these developments are now starting to affect the German economy," European Central Bank President Mario Draghi said at an industry event in Frankfurt on Wednesday.

While Germany's economy long fended off the euro zone's troubles, expanding by 4.2 percent in 2010 and 3 percent last year, growth slowed to 0.3 percent in the second quarter of this year from 0.5 percent in the first and some economists expect a contraction in the fourth quarter.

"The euro zone crisis is hitting the domestic economy. German companies seem to be less and less inclined to invest and that points to the economy contracting in the fourth quarter," said Stefan Schilbe at HSBC Trinkaus.

WINTER GLOOM

"The German economy should regain some momentum in the course of 2013, largely due to an economic recovery beyond the euro zone, but in the coming months economic data is more likely to be disappointing," he added.

The panel of advisers said that while Germany may have managed to consolidate its budget well this year, the darkening outlook means it cannot rely indefinitely on strong tax revenues and "special factors" such as low interest on debt.

It will also have to contend with rising spending in the future due to an ageing population, they said.

Wednesday's Economy Ministry data showed factories churned out 2.2 percent fewer intermediate goods and 3.5 percent fewer capital goods on a monthly basis in September, dragging overall output down. Activity in the construction sector, which rose by 2.7 percent on the month, was the only bright spot.

The ministry said industrial production in the fourth quarter would be weighed down by weak order levels.

"With the various industrial survey indicators pointing to steeper falls in production ahead, Germany's growth engine is still sputtering, if not in reverse," said Jonathon Loynes, chief European economist at Capital Economics.

Industrial companies have taken a knock recently, with German steelmaker Salzgitter (SZGG.DE) cutting its full-year outlook and Continental (CONG.DE), Germany's biggest tyre maker, said it would scale back some production as Europe's debt crisis saps demand.

German industrial production has nonetheless fared much better than struggling euro zone peers such as Spain, where industrial output fell by 7 percent on the year in September.

"In short, the German economy is stuttering but not (yet) plunging," said Carsten Brzeski, senior economist at ING.

(Additional reporting by Sakari Suoninen in Frankfurt, Editing by Gareth Jone/Jeremy Gaunt)

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