Weakness in German industrial sector likely to continue into 2016

Germany's industrial production dropped surprisingly by 1.2% m/m in December, at odds with Barclays and consensus forecasts. The nation had posted a slight growth of 0.1% m/m in November. Throughout major components, capital goods output dropped 2.6% m/m, mainly driving down the industrial production, along with the fall in consumer goods of 2.4% m/m and energy by 3%m/m. The decline in the output of energy indicates the relatively mild winter in the country with weak demand for heating energy.

Meanwhile, durable consumer goods and intermediate goods production rose 2.8% m/m and 9.8% m/m respectively. Fall in manufacturing output by 1.1% m/m and in construction by 0.2% m/m mainly drove the overall decline in industrial production.

On a quarterly basis, the industrial production declined 0.8% q/q in Q4 2015, mainly being dragged by capital goods that fell 1.6% q/q and consumer goods that declined 1.5% q/q. Only intermediate goods production recorded a growth of 0.2% q/q. The weakness in industrial output is on par with the small decline in the assessment of the ongoing scenario in the Ifo survey; however, it is contrary to the strong December manufacturing PMI data.

The weak industrial production data for Q4 is possibly because of the weak industrial orders during the summer, further implying the impact of slowdown in emerging markets on par with weakness in the export sector of the country. The German industry sector in 2015 lacked momentum with growth continuing to remain flat, expanding only 0.5% y/y.

"We believe the weakness in the industrial sector may continue into 2016, with a calculated carry-over of -0.8% q/q, especially with regards to the dependence of the industrial sector on exports and the increasing uncertainty about future demand from global markets, as well as long-standing ramifications of the VW scandal", says Barclays.