German Industrial Output Drops by the Most on Record

By Jana Randow

Feb. 6 (Bloomberg) -- Industrial production in Germany, Europe’s largest economy, dropped the most in at least 18 years in December as demand for plant and machinery faltered.

Output fell a seasonally adjusted 4.6 percent from November, the biggest decline since records for a reunified Germany began in January 1991, the Economy Ministry in Berlin said today. It was the fourth straight monthly drop and almost twice the 2.5 percent retreat forecast by economists in a Bloomberg survey.

Companies are paring output and investment after the global financial crisis drove Germany into its worst recession since World War II. Volkswagen AG and Bayerische Motoren Werke AG cut working hours for 86,000 employees to reduce production after demand for cars imploded. The government expects the economy to contract 2.25 percent this year.

“We’ve experienced the sharpest contraction of industrial production in the fourth quarter since the 1960s and we can’t exclude that output will decline at the same speed in the first quarter,” said Lothar Hessler, an economist at HSBC Trinkaus & Burkhardt AG in Duesseldorf, Germany. “It’s bitter and the forecasts for a return to growth at the end of the year are increasingly standing on shaky ground.”

The German economy contracted as much as 2 percent in the final three months of 2008, the Federal Statistics Office said on Jan. 15. The drop in output in December was led by an 8.2 percent slump in production of intermediate goods. From a year earlier, overall output fell 12 percent, the ministry said.

Global Demand

Exports from Germany plunged a record 10.8 percent in November from October. The Bundesbank forecasts German sales abroad will decline 0.5 percent this year after gains of 4.4 percent in 2008 and 7.5 percent in 2007. Volkswagen, Europe’s largest carmaker, said deliveries fell 20 percent last month.

“The financial crisis has pushed the German industry into a condition of shock and awe,” Carsten Brzeski, senior economist at ING Group in Brussels, said in a research note. “Although German producers have not become less competitive, they now suffer most from the complete collapse of world trade. Even more worrying, the worst is yet to come.”

Manufacturing orders, a gauge of future industrial output, fell 6.9 percent in December from a month earlier, the fourth consecutive decline, the Economy Ministry said yesterday.

“Against the backdrop of a continuously strong decline of demand for industrial goods, a weak development of overall production has to be expected in the coming months,” the ministry said in today’s report.

Economic Cooling

“As an export nation we are strongly feeling the global economic cooling” and “cannot dodge the negative impact of the global financial crisis,” Bundesbank President Axel Weber said last week. “We still assume that the contraction in the first quarter will be followed by a phase of stabilization and in the next year a slight revival.”

Manufacturers in Germany and the rest of Europe have reduced inventories. Salzgitter AG, Germany’s second-biggest steelmaker, said on Jan. 14 it expects demand to pick up as clients run down stockpiles to a low point in the second quarter.

“The build-down of inventories could be a sign that the economic situation is stabilizing,” said Stefan Bielmeier, an economist at Deutsche Bank AG in Frankfurt. “If there’s a recovery, it’ll be via exports and construction.”

Business confidence unexpectedly rose for the first time in eight months in January, the Ifo institute said on Jan. 27, after the government agreed to spend about 80 billion euros ($103 billion) over two years to stimulate the economy.

To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net.