German industrial production in July illustrates fragility of cyclical rebound
The German industrial output data for July underscores the fragility of the country’s economic recovery, as production fell 1.1% month-on-month and 1.6% year-on-year, with notable declines across sectors driven by automotive disruptions and adverse weather conditions. Per the full note from **ING**, the earlier resilience stemming from fiscal stimulus and tax rebates has been overshadowed by emerging threats, including high energy prices and logistical challenges impacting supply chains. Market responses will be crucial given that macroeconomic indicators still sway toward uncertainty in the Eurozone despite robust responses to prior supply shocks. Analysts may need to recalibrate expectations for Germany’s economic outlook in light of these developments.
What the desk is arguing
The desk views the July drop in German industrial production as a clear signal of the underlying fragility in the economic rebound. Per the full note from ING, the reported 1.1% decline month-on-month indicates a disruption in momentum that could affect currency positioning across the Eurozone.
This disappointment comes amidst an already precarious recovery phase, illuminated by earlier growth powered by government incentives and shifts in global demand. The automotive sector’s severe contraction further highlights structural vulnerabilities within German industry, as noted in the analysis by Carsten Brzeski at ING.
Where it sits in our coverage
Currently, our consensus target for EUR/USD sits at 1.075, with a range of 1.04 to 1.12. The following firms have outlined their positions: - JPMorgan: Target of 1.10 for Mar26 - BofA: Target of 1.04 for Mar26
The desk’s perspective is somewhat cautious, slightly aligning with the lower boundary proposed by BofA, suggesting a more bearish outlook in the near term compared to JPMorgan’s more optimistic stance.
How other firms see it
Most analysts, including those from JPMorgan and Deutsche Bank, align with the view that structural challenges in Germany could dampen any potential recovery soon. Conversely, firms like BofA maintain a bearish outlook, anticipating further declines given recent indicators.
As this narrative unfolds, the forthcoming impacts on EUR/USD may reflect the broader Eurozone economic data influencing the ECB's monetary policy trajectory, possibly shifting to a more dovish stance in light of Germany’s performance.
What the calendar says
With no imminent high-impact events on the calendar, the market is likely to remain reactive to data releases and geopolitical developments rather than anticipated economic reports.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Germany's industrial output fell 1.1% in July, signaling a fragile economic recovery.
- 02The automotive sector suffered particularly severe declines, impacting overall production.
- 03Risks from elevated oil prices and logistical challenges can destabilize future chains.
- 04Broader implications for the Eurozone markets are expected as circumstances develop.
Market implications
Traders should monitor the EUR/USD closely, especially how it might respond to broader Eurozone economic sentiment. Key support levels may be tested as market reactions unfold amidst ongoing geopolitical tensions.
Risks to this view
Should energy prices stabilize or begin to decline, this could restore confidence in German industry, potentially invalidating the bearish call on EUR/USD inherent in the current analysis. Additionally, any unexpected economic signals from the ECB might change the landscape dramatically.
Older quick take Quick take Published 07:15 Germany German industrial production in July illustrates fragility of cyclical rebound German industry disappointed in July and shows how fragile the cyclical rebound still is The Rheinmetall Factory in Kassel, Germany Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Carsten Brzeski Global Head of Macro Germany's cyclical rebound halted in July, with industrial production falling 1.1% month-on-month, from 0% MoM in June. On the year, industrial production was down by 1.6%. The July drop was spread across all sectors, with a large collapse in the automotive industry due to production stops.
To some extent, this July data already provides some flavour of the economic impact of the heatwave and drought: production in almost all sectors was down, but energy production (in renewables) was clearly up. Cyclical rebound remains fragile This morning’s industrial production data is a good reminder of how fragile the cyclical recovery of the German economy is. The first half of the year had seen remarkable resilience, driven by fiscal stimulus finally filtering through to the economy, but also a resilience driven by the government’s tax rebate on gasoline for two months.
Finally, the fact that other regions were hit harder by the closure of the Strait of Hormuz had made some German companies a kind of crisis beneficiary, as orders were rechannelled from Asia to Europe and in particular Germany. Looking ahead, the war in the Middle East, which is slowly turning into a forever war, keeping oil prices at elevated levels, as well as the likely upcoming shock of higher gas prices in the next heating season and renewed trade tensions, pose risks to the German outlook. And there's more.
Even if some rain over the last few days in Germany has brought limited relief, low water in the main transportation waterways is another threat to industrial supply chains and production. Let’s wait to see what the August data will bring. At the same time, though, order books have started to recover in recent months, pointing to some positive momentum in industry.
Friday’s new orders for July were another piece of evidence of this upward trend, even though bulk orders are making the interpretation of monthly data even more difficult. However, don’t forget that to bring the large fiscal stimulus to work, bulk orders are simply part of the new economic reality. The third quarter of the year started with a clear setback.
The resilience of the first half of the year will be put to a test over the next few months. In fact, the German economy remains in a difficult limbo. As concerning as the short-term outlook might be, the longer-term outlook for the German economy will still be driven by fiscal stimulus and investments in defence and infrastructure, as well as the ability to translate recent reform plans into real and tangible action.
Let’s not forget that to fundamentally bring the German economy back on a sustainable growth path, the economy still needs more reforms that improve international competitiveness, a clear plan for affordable energy and more direct incentives, e.g. tax cuts, to boost domestic demand, i.e. both corporate investments and private consumption. Elements that are currently still missing in the government’s reform package. The German economy is not out of the woods yet.
Industrial production Germany Eurozone Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Older quick take
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