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German manufacturing output unexpectedly dropped in June following strong increases in previous three months, data released by the Federal Ministry of Economics and Technology showed Friday. But, the decline is unlikely to hurt the German industrial sector recovery.
The seasonally adjusted manufacturing output fell 0.6% month-on-month in June following a revised 2.9% rise in May. That was the first fall in four months. Economists had forecast a 0.5% increase.
"June's modest fall in German industrial production does not change the picture of a rapidly recovering industrial sector, which probably caused GDP to surge in the second quarter," said Jennifer McKeown, an economist at Capital Economics.
Production of intermediate goods dropped 1% month-on-month, reversing the 3.1% rise in May and capital goods output declined 1.1% following a 4.1% increase. The annual growth in manufacturing output eased to 10.9% in June from a revised 12.9% recorded in May. Manufacturing production was expected to rise 11.6% year-on-year.
Despite the fall in June, the near term outlook for the German manufacturing industry is clearly favorable. Yesterday, the ministry said German factory orders increased strongly in June following a slight fall in May driven by a surge in global demand. Orders rose 3.2% month-on-month, reversing May's revised fall of 0.1%. The manufacturing sector will continue to be the main growth driver for the German economy, the ministry said today. Moreover, business climate in July rose the most since the reunification.
"Because of the good business sentiment and the very good development in incoming orders in the last months we expect the trend in manufacturing will continue to point upwards in the months ahead, although industry will hardly sustain its current pace on a lasting basis," Commerzbank analyst Ralph Solveen said in a note.
Germany is expected to lead the Eurozone recovery in the second quarter. The Bundesbank said in its latest monthly report that real GDP is likely to have increased sharply in the second quarter boosted by industrial and construction sector performance. The Federal Statistical Office is due to release second quarter gross domestic figures on August 13. In the first quarter, the biggest Eurozone economy expanded 0.2% sequentially.
Yesterday, European Central Bank President Jean-Claude Trichet set an optimistic tone for the Eurozone economy saying that available economic data and survey-based indicators suggest a strengthening in economic activity in the second quarter of 2010. Moreover, available data for the third quarter are better than expected.
"In the light of the current figures the ECB's muted optimism on the economy seems fully warranted," ING Bank economist Peter Vanden Houte said.
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