German industrial production falls

Frankfurt: Germany's industrial production fell by 1.3 per cent in February after bitter winter weather hit construction activity, adding to the risk that the country had slipped into a technical recession.

The month-on-month fall, reported by the Berlin economics ministry on Thursday, highlighted the weakness of Europe's largest economy at the start of the year. The ministry blamed the decline on February's cold snap, which led to an unexpectedly-steep 17.1 per cent fall in construction activity compared with January.

Germany's economy contracted in the final three months of last year as the eurozone crisis escalated. A second consecutive quarter of falling gross domestic product would amount to a technical recession.

However, Dirk Schumacher, economist at Goldman Sachs in Frankfurt, said that even if March's industrial production levels remained unchanged from February's, the German economy could still have expanded modestly in the first quarter. That would "put to rest" some of the worst fears about the impact of the eurozone debt crisis on Germany's economy although the improvement since late 2011 was "nothing spectacular," he said.

Stripping out weather effects, the latest data pointed to a stabilisation in activity. Manufacturing production fell by 0.4 per cent in February compared with January.

The weakness of the latest figures also cast doubt on the speed of the recovery expected by German policymakers this year. Although German companies are benefiting from an improvement in US and global growth prospects, sweeping fiscal austerity measures are constraining demand for its manufactured products in European markets.

However, Germany's economy is being powered increasingly by domestic demand with steady falls in unemployment and wage increases boosting consumers' spending power in home markets. The economics ministry added that the construction sector should rebound quickly while the "still positive mood among companies" also signalled an improvement in manufacturing sectors.

The fragility of growth prospects across Europe – and rising unemployment in countries other than Germany – explain why Mario Draghi, European Central Bank president, this week dismissed as "premature" talk about an exit strategy to unwind the exceptional support the bank has provided to the eurozone's financial system.