German industrial output falls sharply

The eurozone economy has shown fresh signs of spluttering, with German industrial production dropping unexpectedly sharply in May – the strongest monthly fall since August 1997.

• The latest evidence of a substantial economic slowdown underway will add to fears of “stagflation” – slow growth combined with high inflation. It comes just days after the European Central Bank raised it main interest rate by a quarter percentage point to 4.25 per cent to avert rising inflationary risks.
• Data last Friday had shown the sixth consecutive fall in German industrial orders fall in German industrial orders – which offer a guide to future activity levels. But the latest figures showed German industrial production had already dropped by 2.4 per cent in May, extending a 0.2 per cent fall in April.
• Germany’s manufacturing sector has largely powered economic growth in Europe’s largest economy in recent years. Its deceleration would have considerable knock-on effects in neighbouring countries, adding to the growing gloom about the eurozone’s prospects.
• Spain and Italy – and potentially even France – are in increasing danger of slipping into recession (two consecutive quarter of negative growth) on the back of a slowdown in industrial production, warned Julian Callow at Barclays Capital. However for Germany, the signs “are less strong that it is moving into recession, because of healthy trade vis-a-vis commodity producing countries such as Russia, and in the Middle East and Africa”.
• The ECB warned last week that second quarter eurozone growth figures were likely to be “rather weak,” especially compared with the first three months of the year, when gross domestic product rose by 0.8 per cent. But it argued that after adjusting for volatility, recent data had been in line with “moderate ongoing growth”.
• The Berlin economic ministry argued that two “bridge days” – between a public holiday and weekend – in May could have distorted the latest German data. With production having been boosted by mild weather during the winter, a weaker Spring had been expected, it added.