Germany's factories surprised in August. Destatis reported a 2% month over month rise in output, snapping back from the prior month's drop and marking the biggest increase since March last year. Forecasters polled by Bloomberg were looking for just 0.5%, with no one betting on a move this large.
Construction was the main driver, and even a measure that strips out construction and energy posted a solid advance. Capital goods stood out on the upside, while auto manufacturing retreated. Notably, production increased despite the usual summer headwinds of thinner factory staffing and even with low water on the Rhine squeezing transport of coal, fuel and industrial materials along a critical shipping corridor.
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The headline production bounce offers some comfort as Europe's largest economy tries to rekindle growth. That push includes the government committing billions of euros for infrastructure and defense, a mix that has lately both buoyed and pulled down factory order books.
New orders sank more than 10% in August after back-to-back increases in June and July. The steepest decline, about 62%, hit transport equipment, a bucket that covers military vehicles, aircraft, trains and boats. Even so, manufacturers are sitting on a record backlog equal to nine months of work, and the latest orders stumble is seen as unlikely to knock the broader recovery off course.
Through the six months up to June, strong foreign demand and spending on artificial intelligence helped offset weak investment and consumption, and recent business surveys suggest that momentum has carried on. Economists project growth at 1% for this year, rising to 1.2% in 2028. Germany's leading research institutes are even rosier, more than doubling their 2026 call to 1.3%. Risks remain, including the Iran war and elevated energy costs, which could lean against the recovery.
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