 The decline of 0.3% mom is a surprise to us and the consensus.

It means a third month

of negative growth, something rare for a volatile series like IP (and with September
being revised further down from -1.1% to -1.3% mom).
 There are, however, some relevant silver linings:
o Motor vehicles are still a big drag and fell further in August (see the chart
below). We read this as confirming the Ministry of Economics’ view that
adaptation to new environmental regulation on new cars is acting as a key
drag to German industry in Q3. But a temporary one – which is why the
rebound in orders for cars on Friday was a ray of hope. As were the solid
readings of the IFO in August and September
o Construction was a key driver down in August too – and excluding it, IP was
flat in the month.
 This explains why our preview for the EA on Wednesday didn’t change
by much – the EA data excludes construction.
 All in all, we estimate that IP excluding vehicles and construction
rebounded by 1.1% in August, from the 0.7% and 0.9% falls of June
and July, respectively.
 Despite these sources of consolations, we cannot escape the bad headline numbers,
which is why with…
o today’s IP numbers;
o the first step in the right direction from orders last Friday – but a first step
nonetheless;
o and the still weak VDA count of vehicles leaving German factories,
 … we expect German IP to come in only flat or with small negative growth in
September (we currently have -0.3% mom). And hence, for quarterly growth in
industry to have remained weak in Q3, possibly negative.
 A still-recovering industry in Germany is one of the reasons why we hold a lower-
than-consensus expectation for EA growth in Q3. The 0.7% mom we expect for IP in
the EA on Wednesday would be a healthy reading in normal circumstances, but after
the low numbers of June and July is not a game changer. Our GDP tracking moved
slightly down to 0.35%.
 We remain on the cautious side further ahead too. Although we forecast a better Q4,
there are just too many downside risks to be outright optimistic with German industry
this year.
o An US announcement on tariffs remains a coin-flip, even if they are not met by
actual implementation; Brexit negotiations, lower-than-expected consumption
in France and Italian politics add country-specific risks to EA’s internal
strength; and the PMI Manufacturing only keeps finding new lows.