German industry picked up steam in August
The German industrial sector showed unexpected resilience in August, with a reported 2% month-on-month increase in production, rebounding from a decline of 1.2% in July. This rebound suggests that the adverse effects of the summer heatwave and drought were not as pronounced as previously anticipated. Per the full note from ING, while the construction and manufacturing segments spurred this growth, the automotive sector faced some headwinds likely due to seasonal holidays. The overall landscape, nonetheless, indicates a cautious optimism moving into the third quarter, though the interplay of geopolitical risks and domestic economic challenges will be pivotal for sustained recovery.
What the desk is arguing
The desk views the August rebound in German industrial production as a crucial indicator of resilience amid potential headwinds. This uptick, as noted in ING's report, reflects strong underlying activity despite earlier concerns over weather-related disruptions.
With industrial production up 2.3% year-on-year, driven primarily by construction and manufacturing, the recent data underlines Germany's ability to adapt to unfavorable conditions. However, the desk flags concerns over renewed inventory increases, suggesting that this uptick may not translate into sustained growth if it merely reflects stockpiling intentions rather than confidence in future demand.
Where it sits in our coverage
Currently, our consensus target for the EUR/USD pair is pegged at 1.075, with a range spanning from 1.04 to 1.12. Notably, several firms have positioned themselves strategically around this target: - jpmorgan: 1.10 by Mar26 - bofa: 1.04 by Mar26
The desk's perspective aligns closely with jpmorgan's bullish stance, indicating expectations for a stronger Euro amid supportive economic metrics, while bofa's conservative outlook remains a point of contention in this analysis.
How other firms see it
Firms aligned with a bullish thesis like jpmorgan see the August data as a foundation for further upside in the Euro, expecting an eventual recovery in industrial sectors. Conversely, bofa, with its more cautious stance, points to potential geopolitical risks and high energy prices that may stymie growth.
Traders should keep an eye on the EUR/USD trajectory, which could be influenced by developments regarding the ECB's policy stance and the broader implications of ongoing geopolitical tensions, particularly in the Middle East.
What the calendar says
There are no major high-impact events on the calendar within the next 30 days that could significantly alter this outlook, suggesting traders will need to rely on real-time data and geopolitical developments to inform their positions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01German industrial production rebounded 2% MoM in August, reflecting resilience amid summer heatwave.
- 02Construction and manufacturing sectors drove growth, while automotive faced seasonal challenges.
- 03Renewed inventory increases could signal caution rather than robust demand.
- 04Consensus target for EUR/USD stands at 1.075 amid diverging views from key banks.
Market implications
Traders should monitor the EUR/USD pair closely, especially in relation to the 1.075 target level. Strong industrial data could position the Euro for further appreciation, contingent on geopolitical stability and ECB policy. Watch for any shifts in market sentiment that could emerge from ongoing geopolitical developments.
Risks to this view
Potential risks to this bullish outlook include renewed geopolitical tensions, especially in the Middle East, which could destabilize energy prices and adversely affect German manufacturing. Additionally, if the anticipated economic reforms fail to materialize, confidence in the German recovery could wane, reversing positive momentum.
Older quick take Quick take Published 07:20 Germany German industry picked up steam in August German industry shrugged off the summer heatwave as production rebounded in August German data suggests that the economic impact of the heatwave and drought in August was less severe than feared Resilience continues. After a setback in July, Germany's cyclical rebound gained new momentum in August, with industrial production rising by 2% month-on-month, from -1.2% MoM in July. On the year, industrial production was up by 2.3%.
The August rebound was mainly driven by strong activity in construction and manufacturing, while production in the automotive sector weakened, probably as a result of the summer holidays. Interestingly, this data suggests that the economic impact of the heatwave and drought in August was less severe than feared. More efforts needed to transform positive momentum into a more sustainable recovery Looking ahead, the war in the Middle East, high oil prices, higher interest rates as well as the likely upcoming shock of higher gas prices in the next heating season, pose clear risks to the German outlook.
Recently, production expectations improved again. However, the renewed increase in inventories could suggest stockpiling by companies, anticipating more supply chain disruptions, and not so much preparing for more production. At the same time, order books remain solid but have lost some of the stronger momentum of the first months of the year.
All of this means that the German economy seems to have carried a lot of its positive momentum into the third quarter. Next to the ongoing cyclical challenges, the main challenge will now be to bring the already announced reforms to work to demonstrate the willingness and ability to deliver. However, let’s not forget that implementing the announced reforms alone will not be enough to improve the country’s competitiveness.
In fact, 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. Transforming the current cyclical momentum into a more sustainable recovery still requires more work.
Industrial production Germany GDP 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 Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Carsten Brzeski Global Head of Macro Older quick take
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