German industry shows surprising resilience in June
The desk sees a more resilient German industry, hinting at a cautious but notable recovery in June. Despite higher energy prices and geopolitical tensions in the Middle East, industrial production increased 0.2% month-on-month, driven primarily by automotive output, as highlighted in the recent commentary from **ING**. While this uptick is encouraging, concerns remain about whether it signals a sustainable recovery given that output is still approximately 10% below pre-pandemic levels. Current dynamics in energy prices and geopolitical conflicts will substantially influence the future trajectory of Germany's economic outlook.
What the desk is arguing
The desk frames the recent performance of the German industrial sector as a complex interplay of cyclical rebound against longer-term structural challenges. Per the full note, June's industrial production increment signals a shift towards a modest economic recovery, although it is essential to discern that this improvement arises from previously depressed levels rather than indicative of robust growth.
Notably, the automotive sector has played a pivotal role, reflecting a 0.2% increase in June, while exports followed suit with a 0.9% rise month-on-month. This development underscores the significance of net exports, which have emerged as vital contributors to growth in the second quarter of 2023. Such figures indicate that, even amidst broader global economic pressures, Germany's industrial fabric demonstrates some signs of resilience.
Where it sits in our coverage
Our consensus target for EUR/USD currently sits at 1.075, with a target range of 1.04 to 1.12. Notably, JPMorgan has set a target of 1.10 for March 2026, reflecting a bullish outlook on the euro, while BofA contrasts this with a more cautious target of 1.04 in the same tenor.
This perspective from the desk aligns closely with JPMorgan's optimistic stance, suggesting that the German industrial rebound could bolster the euro; however, it falls within the varying expectations among firms, with BofA representing a more pessimistic outlook on the euro.
How other firms see it
Firms like JPMorgan and Goldman Sachs align with a more positive outlook on EUR/USD, emphasizing the potential positive impact of improving industrial metrics in Germany on the euro's strength. In contrast, BofA and HSBC exhibit a more skeptical view, highlighting concerns regarding the underlying structural issues facing the German economy.
Key indicators to monitor include the interplay of German manufacturing performance with EUR/USD movements, as improvements in industrial output could lead to an appreciating euro against the backdrop of ongoing economic recovery efforts.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01German industrial production rose 0.2% MoM in June.
- 02Exports grew by 0.9% MoM, bolstering the growth narrative.
- 03Uncertainty remains regarding the sustainability of this recovery.
- 04Cyclical improvements shouldn't obscure long-term structural challenges.
Market implications
Watch for EUR/USD movements around the 1.075 target level, as signs of continued industrial resilience could lead to upward pressure on the euro, especially in light of the short-term impacts from energy prices. Positioning may also reflect trader sentiment leading up to potential external shocks.
Risks to this view
A significant decline in energy prices or a deterioration in geopolitical stability, particularly involving the Middle East, could rapidly reverse the current recovery narrative. Additionally, persistently high inflation or unexpected downturns in global trade could undermine the rebound and impact the euro negatively.
Older quick take Quick take Published 06:49 Germany German industry shows surprising resilience in June Despite higher energy prices and the war in the Middle East, German industry continued its modest cyclical rebound, with an improvement in June. However, whether this rebound can really translate into a structural and sustainable recovery remains a different story German industrial production improved in June, defying higher energy prices and the war in the Middle East Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Carsten Brzeski Global Head of Macro Industrial production continues its cyclical recovery. In June, German industrial production increased by 0.2% month-on-month, from 0.7% MoM in May.
On the year, industrial production was slightly down (-0.1%). The June increase was mainly driven by stronger production in the automotive industry. At the same time, exports increased by 0.9% MoM, from 0.9% in May, confirming that net exports were the main drivers of growth in the second quarter.
Despite the war in the Middle East and soaring energy prices, industrial production is proving resilient. Some industries or companies actually seem to have benefited from the war in the Middle East, as Asian competitors were hit harder by the closure of the Strait of Hormuz. However, don't mistake a cyclical rebound for structural improvement.
This is still only a cyclical rebound from low levels. The latest Chinese trade data, for example, shows that Germany’s bilateral trade deficit with China grew in July – indicating that any cyclical improvement in industry should not obscure the view of German industry’s structural problems. Also, even with the latest improvements, industrial production remains some 10% below pre-pandemic levels.
Cyclical rebound to continue Looking ahead, it is obvious that the short-term outlook for the German economy is highly dependent on energy prices, the war in the Middle East and the current heatwave. Even if the German economy has proven more resilient than some had feared, an expansion of the conflict into other trade routes would obviously pose a new risk to the economic rebound. If developments of the last days prevail, bringing a ceasefire and another opening of the Strait, the outlook for German industry would obviously immediately improve.
With production expectations at the highest level since February and order books gradually filling, there is indeed reason for optimism. On the other hand, the warm and dry summer weather has brought water levels in main transportation waterways to record low levels, potentially affecting industrial supply chains and activity in the construction sector (we've written in more detail about this here ). Looking beyond the near-term outlook, 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.
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