German industrial production drops in July

German industrial production unexpectedly fell in July as trade tensions took their toll, according to the latest figures released by Destatis, stoking recession fears.

Industrial output declined 0.6% from June, missing expectations for a 0.4% increase and versus a revised 1.1% decline the month before.

On the year, industrial production slumped 4.2% compared to a revised 4.7% drop in June and versus expectations of a 3.9% drop.

Production in industry was down 0.6% on the previous month on a price, seasonally and calendar adjusted basis. Production in industry excluding energy and construction was down 0.8%.

Within industry, the production of intermediate goods fell 0.7% and the production of capital goods dropped 1.2%. The production of consumer goods showed an increase of 0.6%.

Meanwhile, energy production was down 1.3% in July and construction production increased 0.2%.

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said a recession was "all but confirmed" with the release of this data.

"A much worse headline for industrial output than we had expected, even with the upward revision to the June numbers," he said.

"It’s too soon to say anything about overall production in Q3 as a whole, though the outlook isn’t good. Assuming that production is falling 4-to-5% year-over-year in August and September, the quarter-on-quarter rate will remain negative, at -1.1%, a bit better than the -1.7% in Q2. Finally, the July industrial production headline combined with the dreadful retail sales number now send a convincing signal that the German economy is in recession. The August and September numbers could still spring upside surprises, but we don’t have high hopes."

ING analyst Carsten Brzeski said German industry continues to suffer from structural changes and the ongoing trade conflict.

"At least in the short run, the prospects for German industry remain bleak. Even with a magnifying glass, it is impossible to find signals of an imminent rebound. Shrinking order books, high inventories and continuing external uncertainty do not bode well for the coming months. To make things worse, the third consecutive dry summer could further slow down growth in the second half of the year (again). The water levels in the Rhine have started to fall at a similar magnitude to last summer, even though not yet to the extreme low levels of last year’s very dry autumn season.

"All in all, a very weak start to the third quarter for German industry. Even if this data comes too late to be incorporated into next week’s official ECB forecasts, it will be another argument for ECB members in favour of new monetary stimulus."