German Economy Surprises with Increased Production Despite Tariff Threats

In a surprising turn of events, German industries ramped up production in May, defying expectations amidst looming tariff threats from the United States. According to data released by the Federal Statistical Office, production across industries, construction, and energy providers rose by 1.2% compared to the previous month. Economists surveyed by Reuters had anticipated a stagnation in production levels.

Despite not fully compensating for the 1.6% decline observed in April, the output from March to May was still 1.4% higher than in the preceding three months. The Federal Ministry of Economics noted that the upward trend in industrial production appears to be continuing, having rebounded from a temporary slowdown induced by the announcement of U.S. tariffs in April.

Concerns remain regarding the forthcoming U.S. tariffs, with President Donald Trump expected to soon communicate specific rates that countries can expect on their exports to the U.S. In April, tariffs were initially raised and later temporarily reduced to 10% for most countries, allowing time for negotiations. The U.S. is the largest market for products labeled 'Made in Germany.'

Looking ahead, it is anticipated that domestic demand may bolster the economy and help shield it from potential tariff repercussions. Sebastian Dullien, scientific director of the Institute for Macroeconomics and Business Cycle Research, indicated that increased public investment planned by the government could lead to a more robust economic recovery by year-end. The investment boost is expected to enhance depreciation conditions for new equipment, such as machinery and vehicles.

However, the construction sector continues to be a point of concern. The positive production growth in May was primarily driven by significant increases in the automotive industry, which saw a rise of 4.9% compared to the previous month, and a notable 10.8% increase in energy production. The pharmaceutical industry also contributed positively with a 10% increase.

Conversely, the construction industry experienced a decline of 3.9%, highlighting ongoing challenges in this sector. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, expressed concern over the deepening recession in construction, noting that recent interest rate cuts by the central bank have not translated into improved activity within the sector. This lack of improvement is attributed to the fact that while short-term interest rates have fallen, long-term rates remain relatively high. Additionally, many firms in the construction industry continue to report high material costs.