Europe Industry Rebound Gathers Steam as Output, Demand Increase

(Bloomberg) -- Hopes for a speedy economic rebound in large parts of Europe are holding ground as manufacturing starts to recover from pandemic lows.

Industrial output in Germany -- the region’s biggest economy -- rose at a faster-than-expected pace of 8.9% in June, and factory demand is also increasing. With France and Spain experiencing similar trends, signs are mounting that Europe’s initial bounce-back from the worst recession in living memory may be faster than anticipated.

Euro-area retail sales have already made up for the ground lost during lockdowns, and German trade indicators are now also signaling a revival. The figures, however, will do little to change expectations of a long road to full recovery.

“Although the industrial recovery has further to run, we now expect more moderate growth rates,” Morgan Stanley economists Jacob Nell, Markus Guetschow and Joao Almeida wrote in a note. Risks are “tilted to stagnation or renewed contraction if rising infection rates trigger a more cautious consumer response.”

In Germany, the rise in infections is already worrying government officials. The trend in new cases is going “in completely the wrong direction,” Economy Minister Peter Altmaier said on Friday, highlighting concern among officials in the ruling coalition about a resurgence of the disease.

Renewed trade tensions between the U.S. and China -- two of the region’s major export markets -- could also disrupt the rebound. European Central Bank Chief Economist Philip Lane has already cautioned against any premature optimism, arguing that the third quarter will be key to determining the strength and sustainability of the recovery.

For now, the economy is seeing improvements across most countries and sectors. France reported a 12.7% increase in industrial output in June, and production in Spain was up 14.0% from the previous month.

Germany’s Revival

In Germany at least, economic weakness likely bottomed out in April, according to the Bundesbank. Factory demand in June was at roughly 90% of the levels seen at the end of last year, a separate release on Thursday showed. Output was strongest for investment goods, with car and car-part makers seeing production up more than 50%.

“Having been led initially by domestic consumer spending on goods, the recovery is gradually broadening out to early stages of production and from domestic to foreign demand,” said Holger Schmieding, chief economist at Berenberg. “In the absence of a major accident, Germany can recoup at least half the second-quarter drop in GDP in the third quarter already.”

The European Commission predicts the German economy will contract 6.3% this year and expand 5.3% in 2021. The euro area is set to see a deeper slump of an estimated 8.7%.

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