German output drop raises doubts about growth prospects

BERLIN (Reuters) - German industrial output plunged in December at the steepest rate in 16 months and exports also dropped unexpectedly, suggesting Europe’s largest economy lost momentum at the end of 2015 and may struggle this year.

The surprisingly poor data highlighted the challenges to Germany’s traditionally export-driven economy from a slowdown in emerging markets and signs that growth in the United States, its most important trade partner, may be cooling.

Capital Economics analyst Jonathan Loynes said the “shockingly weak industrial production figures” suggested the German economy barely grew in the fourth quarter.

“The figures deal a further blow to expectations that growth in the German and euro zone economies will pick up in 2016 and add to the urgency for more policy support,” he noted.

Industrial output fell by 1.2 percent on the month in December, the biggest drop since August 2014, data from the Economy Ministry showed. The figure fell far short of the consensus forecast in a Reuters poll for a 0.4 percent increase.

“Industrial production went through a dry spell at the end of 2015,” the economy ministry said, adding that production from October to December fell by 0.8 percent on the quarter.

The data will add to pressure on the European Central Bank to inject more stimulus into the economy at its meeting next month, after market expectations of euro zone inflation hit a record low on Tuesday.

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The five-year, five-year breakeven forward, which shows where markets see 2026 inflation forecasts in 2021 and is one of the ECB's favoured gauges of inflation expectations, fell as low as 1.4740 percent EUIL5YF5Y=R. That is far below the ECB's inflation target of just under 2 percent.


Separate data from Germany’s Federal Statistics Office showed that seasonally adjusted exports and imports both fell by 1.6 percent in December, narrowing the trade surplus to 18.8 billion euros ($21.01 billion).

Economists polled by Reuters had expected exports to rise by 0.5 percent and imports to go down by 0.5 percent with a predicted trade surplus of 20.2 billion euros.

Germany registered a new record trade surplus of 247.8 billion euros for the whole of 2015.

“This morning’s data were a painful reminder that not all is hunky dory in the euro zone’s largest economy,” ING Bank economist Carsten Brzeski said.

An employee of German car manufacturer Mercedes Benz observes the connection between the bodywork and the chassis of an A class (A-Klasse) model at their production line at the factory in Rastatt, Germany, January 22, 2016. REUTERS/Kai Pfaffenbach

“In fact, the German ‘Wirtschaftswunder’ has only some domestic magic left,” he added, noting that consumption has become the most important growth driver thanks to a strong labour market, low interest rates and higher real wages.

But weaker domestic demand was blamed for a bigger-than-expected drop in December industrial orders, reported last week, another sign that the economy might be losing steam.

The Statistics Office is due to publish fourth-quarter gross domestic product data on Friday.

Economists polled by Reuters expect the German economy to have grown by 0.3 percent in October-December, the same rate of expansion as in the third quarter.

In the whole of 2015, strong private consumption and higher state spending drove an economic expansion of 1.7 percent, preliminary data from the Statistics Office showed last month.

($1 = 0.8949 euros)

Reporting by Michael Nienaber and Joseph Nasr; Additional reporting by Mike Dolan in London; Editing by Paul Carrel and Catherine Evans