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German industrial output posts surprise slump in May

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[July 07, 2014] By Alexandra Hudson

BERLIN (Reuters) - Germany's industrial output fell 1.8 percent on the month in May, its biggest drop in more than two years, as holiday days ate into working hours, construction slumped and geopolitics weighed, casting a shadow on its role as euro zone motor.

The drop was a surprise and sent the euro weaker - the consensus forecast in a Reuters poll was for industrial output to be unchanged. The economy ministry also slightly downwardly revised April data to -0.3 percent from a previous -0.2 percent.

The disappointing data added to mounting signs of a weaker second quarter in Europe's largest economy, after it enjoyed quarterly growth of 0.8 percent in the first three months of the year, its fastest growth rate in three years.

The figures also fanned expectations that the European Central Bank (ECB) may have to loosen monetary policy further in coming months in the face of disinflationary pressures and subdued growth.

"After a strong first quarter, industry output weakened over the last months. Besides the effect of the bridge (holiday) days in May and weakness in construction, which was to be expected after the mild winter, geopolitical factors may also have played a part," the ministry said in a statement.

"However sentiment indicators and general economic conditions suggests that output will rise again in the rest of the year after a weaker second quarter," it said.

The ministry did not specify which geopolitical areas were of concern but economists such as the influential Munich-based Ifo think-tank say business is worried about the Ukraine crisis and the impact on oil prices of the insurgency in Iraq.

"The second quarter is gradually turning into a massive disappointment. So far, May has brought disappointing retail sales, falling industry orders and now a significant fall in production," Dekabank economist Andreas Scheuerle said.

"Even if some of this is down to missing days at work because of the bridge days, and might be recovered later, there was simply not the momentum in the second quarter. That said, the general state of the German economy is not in question. The third quarter should be strong again," he said.

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The German government forecasts growth of 1.8 percent for the year as a whole on the back of strong domestic demand and a healthy jobs market. However, expectations of a disappointing second quarter are now widespread.

"It is likely that German growth will at best come in flat in the second quarter, which suggests the other euro countries and the ECB should not pin their hopes on the German engine of growth for the time being," Commerzbank economists wrote in a research note.

Output in the construction sector fell 4.9 percent in May, after an exceptionally mild winter allowed much more building work to take place in the first months of the year. Output in intermediate goods slipped 3.0 percent on the quarter.

(Reporting by Alexandra Hudson; Editing by Stephen Brown and Louise Ireland)

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