German Output Falls More Than Expected on Machinery

By Simone Meier

Sept. 5 (Bloomberg) -- German industrial production declined more than economists expected in July, led by a drop in demand for investment goods such as machinery.

Output fell a seasonally adjusted 1.8 percent from June, when it rose 0.1 percent, the Economy Ministry in Berlin said today. Economists expected a drop of 0.5 percent, the median of 38 forecasts in a Bloomberg News survey showed. From a year earlier, production adjusted for working days fell 0.6 percent.

The German economy, Europe's largest, is showing few signs of recovery after contracting in the second quarter. Factory orders fell in July, manufacturing shrank last month and business confidence declined to a three-year low. Still, oil prices have retreated from a record, bolstering spending power.

``The manufacturing industry is in the middle of a strong downturn,'' said Ralph Solveen, an economist at Commerzbank AG in Frankfurt. Today's figure ``increases the risk of a contraction in third-quarter gross domestic product. The second half will be very weak and 2009 won't be much better overall.''

The euro dropped as low as $1.4212 after the release from $1.4232. The single currency traded at $1.4222 at 12:12 p.m. in Frankfurt. Germany's DAX benchmark shed 1.7 percent to 6175.55.

The gain in June output was revised down from a previously reported 0.2 percent. The ministry said it expects industrial production to show a ``weak'' development over coming months on declining orders and deteriorating business conditions.

Grappling

The German economy may expand 1.5 percent this year instead of a previously projected 1.9 percent, the Organization for Economic Cooperation and Development said on Sept. 2. By comparison, the euro-region economy may grow 1.3 percent instead of 1.7 percent, the Paris-based group said.

German companies have grappled with a 20 percent jump in the euro against the dollar in the past year, which made exports less competitive just as global growth weakened. Stephen Roach, Morgan Stanley's Asian chairman, said on Sept. 2 the global economic downturn has only just begun, with the U.S. economy, the world's largest, heading into a recession.

While the euro has declined from its high, it's still up 4 percent on the year. Oil prices have also retreated, dropping 27 percent from a record of $147.27 a barrel. Still, they're up 45 percent over the past year, sapping companies' spending power.

`Challenging' Environment

Continental AG, Europe's second-largest car-parts maker, said on Aug. 27 that business conditions are ``more challenging.'' Hochtief AG, Germany's largest builder, said last month the weaker dollar eroded 11.6 million euros ($17 million) at the pretax profit level in the second quarter.

In July, output of investment goods declined 3.7 percent from the previous month and construction production fell 2 percent, today's report showed. The output of consumer goods dropped 1.7 percent, with production of durable goods falling 6.5 percent.

German factory orders unexpectedly fell in July, extending their longest ever streak of decline. The VDMA lobby said last week that plant and machine orders dropped for a third straight month in July, led by sliding demand.

In the two months through July, which smoothes out monthly volatility, industrial production fell 1.7 percent from the previous two-month period, the ministry said today.

ECB Rates

Some German companies are trying to offset falling western European and U.S. orders by expanding in eastern Europe, oil- exporting countries and emerging Asia. ThyssenKrupp AG and Salzgitter AG, Germany's largest steelmakers, last month both raised their full-year earnings forecast on increasing demand.

``Are we at the end of the order boom? I don't see that,'' Michael Welt, chief financial officer of Gildemeister AG, the German machine-tool maker founded in 1870, said on Sept. 3. The Bielefeld-based company had ``excellent'' July orders, he said.

The European Central Bank yesterday kept its key rate at 4.25 percent to fight inflation even as the economy cools.

ECB President Jean-Claude Trichet reiterated that the governing council isn't ``surprised'' by the slowdown in the second quarter after a ``brilliant'' first three months. Global growth ``is expected to remain relatively resilient, benefiting mainly from sustained growth in emerging economies,'' he said.

To contact the reporters on this story: Simone Meier in Frankfurt at smeier@bloomberg.net