Unexpected decline in German industry output hints at economic slowdown

By Michelle Martin

BERLIN (Reuters) - German industrial output dipped unexpectedly in August for the third time in as many months, data showed on Monday, suggesting Europe's largest economy lost steam in the third quarter.

Data from the Economy Ministry showed industrial output fell 0.3 percent in August, confounding a Reuters forecast for a rise of 0.4 percent. It followed a fall of 1.3 percent in July, itself a downward revision of an earlier, stronger number.

Jennifer McKeown, economist at Capital Economics, said the weak reading, combined with a recent downturn in retail sales, indicated the economy had not sustained its strong start to the year.

"August's 0.3 percent fall in German industrial production is much weaker than expected and suggests that the economy is very unlikely to match the second quarter's 0.5 percent expansion in the third quarter," she said.

Economists are taking an increasingly pessimistic view of the German economy, with the top German institutes last month revising down their 2018 growth forecast and warning that an escalation of trade friction involving the United States could cause a major recession in Germany and Europe.

A source has also told Reuters that the government will revise down its growth forecasts for this year and next. The government is expected to announce its updated growth projections on Thursday.

CONSTRUCTION WOBBLE

A breakdown of the output data showed construction activity tumbled by 1.8 percent while factories churned out 0.7 percent fewer capital goods. But output of consumer goods and energy were bright spots.

The ministry said one reason for the weaker data was slower production in the auto sector related to difficulties adjusting to a new pollution standard - the Worldwide Harmonised Light Vehicle Test Procedure (WLTP).

"With a large order backlog and incoming orders picking up again, the industrial upturn will probably continue again soon, especially as the bottleneck for the registration of cars according to the WLTP standard is gradually clearing," it said.

In the less volatile two-month comparison comparing July/August with May/June, production tumbled by 1.8 percent.

"The slowdown of the German industry continues," ING economist Carsten Brzeski said, adding the sector had undergone a deflationary phase in the first eight months of the year.

But he added that it was too early to lose hope, adding: "Too often has there been a surge in industrial (and economic) activity in Germany after the summer vacation."

Data on Friday had shown industrial orders rebounding in August as an auto sector bottleneck cleared and deals with customers outside Europe picked up sharply.

Other recent data has shown growth in the manufacturing sector slowing and the Ifo institute's monthly survey showed business sentiment improved in all sectors other than manufacturing.

(Reporting by Michelle Martin; Editing by Thomas Escritt and Raissa Kasolowsky)