German factory production expands at fastest rate for a year

German industry has rebounded more strongly than expected at the start of this year after factory production grew at the fastest rate for a year in February, thanks to strong growth in construction and carmaking.

The 2.1 per cent monthly increase in output was the second month of solid growth for German industry after growth was revised up to 1.3 per cent in January, according to figures published by the federal statistics agency on Monday.

The rise was well above the 0.3 per cent rise forecast in a Reuters poll by economists, who said the recent pick-up in German industry reduced the chances of Europe’s largest economy shrinking again in the first quarter.

However, industrial production is still down 4.9 per cent from a year ago and down nearly 8 per cent from a peak before the coronavirus pandemic.

“The outlook for the sector still looks poor,” Franziska Palmas, senior Europe economist at Capital Economics, said after business surveys pointed to declines in German factory activity in March and a fall in new industrial orders to their lowest level since the emergence of Covid-19.

The industrial sector’s weaknesses — hit by a surge in energy prices after Russia’s full-scale invasion of Ukraine two years ago and falling exports to China — have contributed to a stalling of the German economy, which was the weakest of any major developed country last year, shrinking 0.3 per cent.

Five German economic research institutes last month slashed their growth forecasts, predicting gross domestic product would expand only 0.1 per cent this year, down from their earlier prediction of 1.3 per cent six months earlier. The Bundesbank recently forecast the economy would shrink again in the first quarter.

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said the industrial rebound would “go a long way to support GDP growth amid what appears to be still-falling consumer spending on goods”. He predicted a quarter-on-quarter increase in German industrial production of 0.5 to 1 per cent in the first three months of the year.

February’s figure was bolstered by growth of 7.9 per cent in the construction sector, reflecting unseasonably dry weather. There was also growth of 5.7 per cent in carmaking and 4.6 per cent in chemicals as supply bottlenecks and energy price pressures eased.

But some economists warned that weak order growth meant the rebound was unlikely to last. New orders at the country’s manufacturers were down 10.6 per cent in February from a year earlier, despite a slight increase from the previous month.

There were few signs of a rebound in foreign demand for German goods after exports declined 2 per cent from the previous month and 4.4 per cent from a year earlier.

“The increase in production in February has increased the chances that the German economy will not shrink again in the first quarter,” said Ralph Solveen, deputy head of economic research at Commerzbank, adding that “production is likely to stagnate at best in the coming months”.