German Industrial Production Falls More Than Expected

German industrial production dropped more than economists predicted in May, adding to signs that Europe’s sovereign debt crisis is weakening a recovery in the region’s largest economy.

Production fell 1 percent from April, when it gained a revised 2 percent, the Economy Ministry in Berlin said today. That’s the first decline since January. Economists forecast a drop of 0.5 percent, according to the median of 38 estimates in a Bloomberg News survey. From a year earlier, production decreased 1 percent when adjusted for working days.

German exports unexpectedly fell in May, the Federal Statistics Office said today, and factory orders dropped for a second month as the 17-nation euro region struggles to emerge from the longest recession since the introduction of the single currency in 1999. Still, German unemployment declined in June while confidence among entrepreneurs and investors improved.

“German industrial and trade data are a blow to hopes that a strong recovery in the euro zone’s largest economy might soon pull the region out of recession,” said Jennifer McKeown, senior European economist at Capital Economics in London. “German exporters are not immune to the effects of weak demand elsewhere in the euro zone.”

The euro rose after the report and traded at $1.2853 at 12:54 p.m. in Frankfurt, up 0.2 percent today. Germany’s benchmark DAX index increased 2.3 percent to 7987.80, while the Stoxx Europe 600 Index gained 1.2 percent to 291.74.

Continuing Recovery

German gross domestic product increased 0.1 percent in the first quarter after a 0.7 percent contraction in the final three months of 2012. The Bundesbank said last month that economic growth may have increased “markedly” in the second quarter, while warning of signs of a slowdown later this year.

Manufacturing output fell 0.7 percent in May, with production of investment goods down 2.3 percent, today’s report showed. Construction slumped 2.6 percent, while energy output dropped 1.5 percent.

Even though production weakened “somewhat,” the Economy Ministry said in the statement, “the recovery of the industrial sector should continue in a slightly damped fashion.”

The truck business of Daimler AG, the world’s biggest maker of the vehicles, needs to accelerate spending cuts and deliveries to achieve this year’s earnings goal, Wolfgang Bernhard, the head of the division, said on July 1.

Germany’s VDMA machine makers’ association cut its 2013 production forecast on July 4 to a contraction of 1 percent from expected growth of 2 percent.

Private Consumption

“Today is definitely not a good day for the German economy,” said Carsten Brzeski, senior economist at ING Groep NV in Brussels. “The euro zone’s economic engine is still not running smoothly. The only constant of the German economy was private consumption on the back of the solid labor market and recent wage increases.”

The euro-area economy, Germany’s biggest export market, shrank in the six quarters through March and European Central Bank President Mario Draghi said last week that the risks to the outlook are to the downside. He gave what he called “unprecedented” forward guidance that interest rates will stay low for an extended period of time.

Still, Draghi last week reaffirmed his prediction for a recovery at a subdued pace later this year. The ECB expects the 17-nation economy to contract 0.6 percent in 2013 before expanding 1.1 percent in 2014.

Japanese Trade

In Japan, the current-account surplus widened 58 percent in May from a year earlier to 540.7 billion yen ($5.3 billion), according to a Ministry of Finance report released in Tokyo. Increases in exports and income from overseas investments contributed to the gain, adding to signs the nation may avoid sliding into a persistent deficit.

In the U.S., consumer borrowing may have accelerated in May, with economists predicting a $12.5 billion increase in credit, according to the median of 28 forecasts in a Bloomberg News survey.

Back in Germany, “recent indicators point to some minor problems,” said Andreas Moeller, an economist at WGZ Bank in Dusseldorf. “But compared with the rest of the euro area, the economy is still solid and will grow throughout this year.”

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