July 7, 2014 / 6:35 AM / in 3 years

UPDATE 2-German industrial output posts surprise slump in May

* Industry output suffers biggest fall in 2 years
    * Hit by holidays falling in May, geopolitical factors
    * Euro weakens on data
    * Growth set to continue after weaker second quarter

 (Adds background, economist comment, euro reaction)
    By Alexandra Hudson
    BERLIN, July 7 (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.
    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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