Strong numbers from Germany but risks remain

We finally have some positive news out of the Eurozone. German factory orders and industrial output spiked in March. After a sharp selloff on Sunday, global equity markets recovered yesterday on the back of the latest numbers from Germany.

Reuters: - German industry output shot up far more than expected in March after a weak winter, lifting hopes Europe's biggest economy will gather steam this year and highlighting its economic divergence with much of the rest of the euro zone.

Production in Germany jumped 2.8 percent in March seasonally adjusted from the previous month, Economy Ministry data showed on Tuesday, recovering from a revised 0.3 percent decline in February.

The figures were well above the consensus forecast in a Reuters poll for a 0.8 percent rise, and overshot the highest forecast of a 2.4 percent increase.

"Hibernation has ended," said Carsten Brzeski at ING Bank.

"While almost all other euro zone countries are currently caught in the downward spiral of austerity measures, deleveraging and economic reforms, the German economy is still enjoying the results of earlier structural reforms," he said.

The jump in output followed a steep rise in industrial orders in March, which rose on the back of demand from outside the ailing euro zone.

Driving a great deal of the spike in German industrial production in March was construction.

WSJ: - Construction was the main driver in March, rising a massive 30.7% on the month after a 16.9% drop in February during a bout of unusually cold weather. [see chart]

Germany Industrial Production Construction SA (Bloomberg)

In spite of these positive results out of Germany on construction, one has to be cautions in assuming that such growth can be sustained. As we get glimpses of April's construction activity, the picture does not look as rosy. The German construction PMI for April is indicating a flat month.

Markit Economics: - The seasonally adjusted Germany Construction Purchasing Managers’ Index® – a single figure snapshot of overall activity in the construction economy – fell from March’s 11-month high of 55.7 to 49.8, indicating broadly no change in total construction activity across Germany in April. [a measure of 50 indicates no change]

Without the strong construction numbers the overall output in April will be far more modest. Also German growth is increasingly driven by exports to Asia as domestic consumption growth remains relatively weak.

German consumer confidence YOY (Bloomberg)

And given uncertainties associated with China's growth, risks remain for Germany.

Reuters: - "It would be premature to believe that the German economy can maintain strong growth rates when the rest of the euro zone is faltering," said ING's Brzeski.

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