German industry is still clearing backlogs

Industrial production in Germany came in stronger than expected in October, falling by only 0.1% mom, whereas the consensus forecast was for a steeper 0.6% contraction. Moreover, the September number was revised higher, to 1.1% mom, up from an original estimate of 0.6%. However, these positive surprises in September and October largely reflect the working away of backlogs that had built during the pandemic. Indeed, the ratio between manufacturing orders and manufacturing production dropped sharply lower over the past few months, and has now almost returned to pre-pandemic levels. If the recent monthly changes in orders and production were to be maintained in the months ahead, the backlogs will probably be cleared during the first quarter of 2023.

While new manufacturing orders increased by 0.8% mom in October – also higher than consensus (0.1%) – the rise was entirely concentrated in notoriously volatile capital goods orders (+3.3% mom in October), with orders for consumer goods (-6.3% mom) and intermediate goods (-1.4%) dropping. The less volatile 3m/3m change in manufacturing orders dropped to -2.9% in October, down from -1.2% in September. This indicates that, barring the clearing of backlogs, the trend in Germany’s manufacturing sector is clearly one of contraction. Contraction in production would also be in line with the current levels of Germany’s Ifo business climate in manufacturing and manufacturing PMI, which have dropped to levels well below the long-term average.