LDN - Business

Surge in German factory output points to strong GDP growth in third quarter

[October 09, 2017] By Michael Nienaber

BERLIN (Reuters) - German industrial output posted its biggest monthly rise in more than six years in August, data showed on Monday.

It suggested the economy is firing on all cylinders again and set for solid growth in the third quarter, although a question about the make up of the new government could add uncertainty.

The combined production of manufacturing, construction and energy increased by 2.6 percent on the month after edging down by 0.1 percent in July, data from the Economy Ministry showed.

That was the strongest monthly gain since July 2011 and easily beat expectations in a Reuters poll for a 0.7 percent rise, surpassing even the most optimistic estimate.

"These figures are very good," Commerzbank economist Ralph Solveen said. He pointed to special factors such as plant holidays falling in July in some regions this year, meaning output was likely to come in weaker next month.

"Overall, we expect solid (GDP) growth in the third quarter. Our estimate is roughly 0.6 percent on the quarter," Solveen said.

Manufacturing output rose by 3.2 percent, its biggest rise since March 2010, as factories churned out more intermediate goods, capital goods and consumer goods in August. Energy output also rose while construction activity fell.

Manufacturers of cars and other vehicles were the main driver behind the overall surge, the ministry said, also pointing to earlier plant holidays.

The ministry said industrial production had gained momentum since the start of the year.

SOLID UPSWING

"The good business morale and the positive development in industrial orders point to a continuation of the solid industrial upswing," it said.

Data published on Friday showed that strong foreign demand, especially from clients outside the euro zone, drove a bigger-than-expected jump in industrial orders in August.

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A worker controls a tapping of a blast furnace at Europe's largest steel factory of Germany's industrial conglomerate ThyssenKrupp AG in the western German city of Duisburg December 6, 2012. REUTERS/Ina Fassbender/File Photo

ING Bank chief economist Carsten Brzeski said the strong production data provided further evidence that the economy had left its summer lull behind and returned to maximum speed.

"With the expected investment program of the new government, the current cycle should be extended by another couple of years," Brzeski added.

The German economy grew 0.7 percent on the quarter in the first three months of the year and 0.6 percent from April to June, driven by increased household and state spending as well as higher investment in buildings and machinery.

Leading economic institutes have raised their growth forecast for the German economy to 1.9 percent in 2017 and 2.0 percent in 2018.

The German government will present its updated projections for GDP growth, employment and inflation on Wednesday.

"The outlook further ahead is positive too, with domestic demand supported by low unemployment and still loose monetary policy and the global environment supportive," Capital Economics analyst Jennifer McKeown said.

The economy might even benefit from a small post-election fiscal boost, McKeown said, adding she expected German GDP to rise by an even stronger rate of 2.3 percent this year.

The biggest risks to Germany's upswing come from the outside, Brzeski said, pointing to geopolitical risks, the stronger euro and a possible slowdown of the U.S. economy as a result of further absence of tax relief or investment programs.

Other risks include a slowdown of the British economy due to the continuing Brexit uncertainty and China's transition from an important export destination to a serious competitor, he added.

(Reporting by Michael Nienaber Addtional reporting by Rene Wagner; Editing and Graphic by YDBJeremy Gaunt)

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