German industrial output disappoints on weak energy

By Michael Nienaber

BERLIN (Reuters) - German industrial production flatlined in July as a slight rise in manufacturing and construction output was offset by a plunge in the energy sector, suggesting that factories will contribute to growth more slowly in the third quarter.

Record-high employment, increased job security and rising real wages are powering a consumer-led upswing in the German economy that looks set to help Chancellor Angela Merkel win a fourth term in office in a federal election on Sept. 24.

In a rare sign of weakness in Europe's biggest economy, data published on Wednesday had shown that feeble domestic demand drove a surprise fall in industrial orders in July.

Thursday's unchanged reading for industrial output, according to Economy Ministry data, followed a fall of 1.1 percent in June and compared with a consensus forecast in a Reuters poll for a 0.6 percent gain.

ING economist Carsten Brzeski said the disappointing data could give rise to doubts about the strength of the economy. But he noted that industrial production had registered unbroken growth in the first five months of the year.

"Some pause in this trend was bound to happen," he said. "In our view, the prospects for the German industry remain rosy, at least for the short term."

A breakdown of the data showed factories churned out more intermediate goods in July while production of capital goods and consumer goods fell slightly.

Construction activity also rebounded, but energy output tumbled 4.7 percent which was the steepest monthly fall since January 2011 - cancelling out increases in the other sectors.

"VERY DYNAMIC"

The economy ministry said industrial production lost momentum in the summer after a "very dynamic" first half, adding that indicators pointed to a continuation of the industrial upswing, albeit at a slower pace than in the first six months.

Brzeski said German industry was "simply still on annual leave" in July but should return with a rebound after the summer. He also pointed to the prospect of more fiscal stimulus after the election.

Ulrike Kastens from Sal. Oppenheim agreed that the weak industrial data showed the economy taking a breather rather than reaching a turning point.

"Overall growth will be slightly weaker in the third quarter than in the first half of the year, but the upswing will continue and remain solid," she added.

The German economy grew by 0.7 percent on the quarter in the first three months of the year and by 0.6 percent from April to June, driven by increased household and state spending as well as higher investment in buildings and equipment.

The International Monetary Fund (IMF) expects the German economy to grow by 1.8 percent in 2017 and by 1.6 percent in 2018 in real terms. This would be slightly below the 1.9 percent in 2016, which was the strongest rate in five years.

(Reporting by Michael Nienaber, editing by Emma Thomasson and John Stonestreet)