German industrial output beats forecasts with 0.9% May gain

Industrial production in Germany rose 0.9% in May from the prior month, beating the consensus forecast for a 0.2% decline and extending April's upwardly revised 0.2% gain, Destatis data showed Tuesday.

"The recovery has already begun behind the scenes, evident in the manufacturing sector's order intake, which will soon fuel production over the longer term," Sebastian Wanke, an economist at KfW Research, said.

Factory orders, a leading indicator, rose 1.9% in May, exceeding the 1.5% gain expected by economists in a Reuters poll. The increase was driven by an 85% surge in the "other transport equipment" category, which includes aircraft, ships, trains and military vehicles. Excluding large-scale orders, new orders were still 1% higher on the month. Foreign orders rose 2.2%, with eurozone orders jumping 11.2%, while domestic orders increased 1.3%.

The data supports the narrative of a gradual recovery in German industry after years of subdued output that began before the pandemic, though risks remain elevated. The conflict in the Middle East continues to cloud the outlook, with higher energy costs and supply-chain uncertainty weighing on activity. The European Central Bank raised interest rates in June to prevent higher energy prices from feeding into broader inflation, adding headwinds for the industrial sector. Still, the government's pledge to mobilize more than $1 trillion for defense and infrastructure spending has fueled optimism that a sustained recovery could take hold later this year.

Factory Orders Rise 1.9%, Pointing to Recovery

The 1.9% rise in factory orders in May follows a revised 3.2% decline in April, a smaller drop than the initially reported 3.8% decrease. The less volatile three-month-on-three-month comparison showed new orders in the March-to-May period were 0.2% lower than the preceding three months, suggesting the recovery remains uneven. "Based on this upward trend in orders, we expect a recovery in German industry, even if it is likely to be moderate," said Marco Wagner, senior economist at Commerzbank.

The last time German industrial output posted consecutive monthly gains was in late 2025, when production rose 0.4% and 0.6% in September and October before stalling. That recovery faded as the Middle East conflict escalated and energy costs surged, highlighting the fragility of the current rebound.

Headwinds Persist Despite Green Shoots

Despite the positive data, economists caution that structural challenges remain. German companies continue to suffer from an erosion of competitiveness, and the conflict in the Middle East has added a layer of uncertainty. "Even though the federal government's reform package has brought progress on individual points, it is unlikely to represent a broad-based breakthrough," Wagner said.

Carsten Brzeski, global head of macro at ING, noted that German industry has weathered the Middle East disruptions better than feared. "Despite initial fears that the conflict in the Middle East would trigger new supply chain disruptions, German industry appears to have escaped with little more than a black eye," he said, adding that German companies have benefited from Asian competitors being more exposed to disruptions affecting trade in the Strait of Hormuz.

The ECB's June rate increase complicates the outlook. The central bank lowered its growth forecasts last month, projecting the eurozone economy will expand 0.8% this year and 1.2% in 2027. Many economists expect the ECB's focus to shift from inflation risks to slowing growth in the coming months, which could open the door for rate cuts that would support industrial activity.

Wanke said the recovery will gain momentum once oil and gas can again pass freely through the Strait of Hormuz and reforms provide additional momentum. A sustained recovery in German industry is seen as crucial to lifting the wider eurozone economy, which has struggled to gain traction as elevated borrowing costs and geopolitical uncertainty weigh on activity.

This article is for informational purposes only and does not constitute investment advice.