German Industrial Production Drops Most Since 1995

By Gabi Thesing

Nov. 7 (Bloomberg) -- Industrial production in Germany declined the most in almost 14 years in September, increasing the likelihood of a recession in Europe's largest economy.

Output dropped a seasonally adjusted 3.6 percent from August, the Economy Ministry in Berlin said today. That's the most since January 1995. Economists expected a decline of 1.7 percent, the median of 36 forecasts in a Bloomberg News survey showed. From a year earlier, production adjusted for working days fell 2.1 percent.

German companies are scaling back production as the global economy buckles under the credit crisis and higher borrowing costs, hurting export markets and causing consumers to cut back on spending as they worry about their jobs. Factory orders recorded the biggest monthly drop ever in September and business confidence last month slumped to a five year low.

``It's looking grim and will continue to look grim for quite some time,'' said Stefan Bielmeier, an economist at Deutsche Bank AG in Frankfurt who forecasts Germany's economy will contract 1.5 percent next year. ``Germany's fortunes are tied to export markets and they are all collapsing. The German consumer won't be able to outspend the decline in exports.''

The ministry revised last month's figure to a 3.2 percent increase from an initially reported 3.4 percent, according to today's statement. Last month's gain was overstated on holidays.

Washing Machines

This month's drop was led by a 7.2 percent slump in the production of durable goods such as washing machines and televisions, the ministry said in the statement.

``Due to continued weak demand in manufacturing and the construction industry the outlook for production remains markedly dimmed,'' the ministry said in the statement.

Banks have recorded almost $700 billion in writedowns and losses tied to the U.S. mortgage market since the start of 2007. That's forced central banks to slash interest rates and governments to bail out lenders. The European Central Bank and the Swiss National Bank yesterday lowered their key rate by 50 basis points, while the Bank of England cut by 150 basis points.

The yearlong credit crunch is already feeding into the economy. German luxury carmakers Bayerische Motoren Werke AG and Daimler AG have both scaled back production after they had to scrap their 2008 profit forecasts, citing declining markets.

The association of German chemical makers, VCI, which includes BASF SE and Bayer AG, cut its 2008 production forecast to 1 percent growth from a previous estimate of 2.5 percent. Already production in the third quarter fell by 1 percent from the previous three months, the group said Nov. 4.

German Exports

The European Commission said earlier this week that the European Union's economy, which accounts for 62 percent of German exports, will probably enter a recession in the fourth quarter, and said Germany won't grow at all next year.

Households are cutting spending and have boosted savings on increased concern about job security. Retail sales contracted for a fifth month in October, the Bloomberg Purchasing Managers Index showed Oct. 30. At the same time, households increased their savings to 11.3 percent of disposable income in the first quarter, the Federal Statistics office said Oct. 20.

Germany's DAX benchmark index has shed 9 percent over the past month, bringing declines to almost 40 percent this year.

Chancellor Angela Merkel's government hopes to soften the impact on the economy with a package of measures aimed at unlocking 50 billion euros ($64 billion) of investments.

Tax Relief

The program, which also includes increased tax relief on household repairs, loans to small and medium-sized businesses and money for roads and railways, is ``bold and targeted'' and will help revive economic growth in 2010, Merkel said on Nov. 5.

Companies may also get some relief from lower oil prices and a weaker euro. The price of crude oil has more than halved from its July record of $147 a barrel, while the euro has tumbled almost 20 percent in the past four months.

This helped boost German exports in September, which rose more than economists expected, a report showed this morning. Sales abroad gained 0.7 percent from August.

Still, it may not be enough to shield German industry from the impact of the financial crisis.

``The worst is still to come for manufacturers,'' said Carsten Brzeski an economist at ING Group in Brussels. ``The industrialized world is heading for a recession and the German economy is in the middle of the storm.''

To contact the reporter on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.net