August 8, 2013 / 4:56 PM / 7 years ago

Revival in German industry bodes well for bumper Q2 growth

* Industry revives after weak winter half-year

* Economists expect bumper Q2 economic growth

* Germany could pull euro zone out of recession in Q2

* Preliminary GDP figures due for release on Aug. 14

By Sarah Marsh

BERLIN, Aug 8 (Reuters) - A rebound in Germany’s mighty industrial sector from a weak winter has probably fuelled strong growth in the wider economy which could help to pull the euro zone out of recession.

If low unemployment and wage increases produce similarly robust consumption, all bodes well for bumper GDP growth of between 0.6 and 1 percent when second quarter figures are published next week, economists predict.

Recovery after a winter brush with recession is likely to help Chancellor Angela Merkel’s already strong position for federal elections in September, while solid state finances should allow whoever wins to ease controls on state investment and encourage the private sector to follow suit.

June data this week suggested that industrial output surged 2.8 percent in the April-June quarter, partly catching up after the long winter when it languished due to the global slowdown and harsh weather which hit construction especially hard.

“We should see the German economy over-shooting in the second quarter with growth of around 0.7 percent, and then cruising along nicely in the second half of the year at quarterly growth rates of between 0.3 and 0.4 percent,” said Carsten Brzeski, an analyst at ING.

Official preliminary data for both German and euro zone gross domestic product in the second quarter is due on Aug. 14.

Germany’s economy propped up growth in the euro zone during the early years of the region’s crisis but faltered at the end of last year, and it only narrowly avoided a recession at the start of 2013 thanks to private consumption.

Brzeski said this week’s data suggested the Bundesbank and government - which have respectively forecast 0.3 and 0.5 percent full-year growth, while stressing risks that might make the figure fall short of this - may have under-estimated the speed of the second quarter catch-up.

Analysts caution that the economy is unlikely to keep achieving similarly buoyant quarterly growth rates due to weakness in Germany’s main euro zone trading partners and softer demand in emerging markets, especially China.

Brzeski calculated that the monthly industrial orders figures gave a 1.2 percent quarterly rise. This, along with Markit’s purchasing managers’ Index (PMI) survey showing a return to growth in manufacturing, has nonetheless raised hopes of a lasting recovery.

Early signs of the pick-up are giving a much-needed boost to companies in other euro zone nations which supply German manufacturers. Euro zone manufacturing activity grew for the first time in two years in July, a survey by Markit showed.

“Germany benefits strongly from demand from beyond Europe, so if the order books of German exporters are well filled then this bodes well for the dynamic in France, Italy and the rest,” said Alexander Koch, an analyst at Unicredit.

Still, data on Thursday showed a fall in imports, underscoring that Germany can stimulate neighbouring economies only up to a point. Retail sales data have also been downbeat in recent months, raising questions about the strength of domestic demand. There figures, however, are prone to large revisions,

BROAD-BASED RECOVERY

Economists had already expected a strong German rebound in the second quarter, but many said the industrial output figures suggested it could be even greater than they had forecast.

“Given the data, we see upside risks to our GDP forecast of 0.5 percent,” said Heinrich Bayer at Postbank, while Unicredit’s Koch said the same of his estimate for 0.6 percent growth.

Ben May at Capital Economics said he expected the industrial sector to boost GDP in the second quarter by up to 0.8 percent, after making no contribution in the first.

German industrial firms have remained cautious during the current earnings season. Many, such as chemicals maker BASF and Lanxess, complained about weak demand in the euro zone - where Germany exports 40 percent of its goods - and China, which many had seen as a strong alternative market.

Not only are the big names suffering. Commerzbank’s cash cow Mittelstandsbank, which services medium-sized firms, posted a fall in operating profit on Thursday. This suggested that such “Mittelstand” firms, which play an important role in the German economy, are borrowing less as their business suffers.

Yet two-month averages for industrial output signal the recovery is robust and broad-based across manufacturing and construction. The latter bounced back especially strongly thanks to low interest rates and possibly reconstruction after Germany’s worst floods in a decade.

A stabilising euro zone economy and brightening outlook for the United States and Britain are vital for Germany, and trade data showed a slight rise in exports in June although imports are expected to outpace them for the full-year.

Anton Boerner, head of the BGA trade association, said he still expected exports to rise 3 percent this year, predicting strong growth in the fourth quarter. “This is what the latest orders suggest,” he told Reuters, referring to the biggest rise in orders in June since last October.

Tim Moore at Markit was also upbeat. “We are optimistic for the second half of year based on the improving figures for new orders and job creation in our purchasing managers’ index survey,” he said.

Moore expects Germany to drag the euro zone out of recession in the third quarter rather than the second, and already sees evidence of a turnaround in euro zone exports.

INVESTING AGAIN?

Uncertainty about the export outlook has caused many firms to slow investment, but some economists say this is changing. A turnaround in investments is essential for the economy to achieve strong growth, rather than only a moderate performance.

Commerzbank analyst Ulrike Rondorf said sentiment indicators and a rise in capital goods orders suggest firms are becoming more upbeat, and that the negative influence of the debt crisis has receded.

A survey of Mittelstand companies conducted by Ernst & Young showed 40 percent saw their business situation improving in the coming six months, while only 7 percent expected a deterioration.

The International Monetary Fund said this week that Germany - which has been trying to set an example to other euro zone countries to get their budgets in order - could do more to stimulate domestic growth, given its solid public finances.

ING’s Brzeski said this may come after September, with tax incentives to invest or more public investments.

“The current government’s aim of having a balanced budget, also to be an example to other counties, overruled all other plans,” said Brzeski. “But now of course, with a very favourable fiscal position, no matter who will be in the next government, we should see some investment after the elections.”

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