German car production boosts industrial output in June

German industrial production grew by 0.8% month-on-month in June and 0.9% in comparison to a year before, according to the country´s Ministry of Economics.

Economists had penciled in a rise of 0.7% month-on-month and 0.6% year-on-year.

Manufacturing output jumped 1.5% over the month, led by an increase of 3.5% in the production of capital goods and a 1.2% rise in the output of consumer goods.

Automobile production rocketed 12.4% over the month and by 0.3% over the quarter.

That was "consistent with a diminishing negative impact of the Volkswagen scandal on the German auto industry," Barclays Research´s Olga Tschekassin and Tomasz Wieladek said in a research report sent to clients.

Food production (withing consumer goods) was up by 0.2% over the latest quarter, thanks to the large number of immigrants which were continuing to arrive, albeit in "much smaller" numbers than in the backhalf of 2015, they said.

Output of intermediate goods on the other hand fell by 0.7% month-on-month.

Energy production fell 2.7% while that of construction shrank by 0.5%.

May´s reading on industrial production was revised higher by 0.4 percentage points to show a decline of 0.9%.

In terms of quarterly rates of change, industrial production was down by 1.0% - the weakest reading since the second quarter of 2014 - following an expansion of 1.7% over the previous three months.

Economists divided on outlook

Following the release of the above data Barclays penciled in a reduction to the second quarter German GDP growth estimate of 0.1 percentage points to 0.3% quarter-on-quarter.

"We believe that the June growth momentum is unlikely to be sustained in the coming months as uncertainty stemming from UK’s Brexit vote will weigh on international trade and investment and with this on the demand for German industrial goods. This is consistent with last week’s factory order data, which surprised to the downside (-0.4% m/m) sending negative signals for the German industry in H216."

However, their forecasts for growth in the third and fourth quarters of 2016 were both revised higher by one tenth of a percentage point to 0.3% and 0.2%, respectively.

Dr. Andreas Rees, chief German economist at UniCredit Research was more sanguine.

"The rise [in industrial production] does not have anything to do with shrugging-off Brexit, as the referendum took place at the end of June and could still not influence production activities significantly. Instead, a reversal of the negative working-day effect in the auto sector (bridge days in May) contributed to the rise. Anyway, there is reason to believe that growth dampening effects caused by Brexit will be moderate going forward.

"[...] Major driver of the growth deceleration [in the second quarter] is not a fundamental one but a weather-related setback in the construction sector."

Dr. Rees pointed to business sentiment at a post-Reunification high, the prospect for a rebound in construction, job creation and wage as the positive fundamentals underpinning German growth.