Concern as German industrial output stutters

German industrial output unexpectedly slumped in August, the economy ministry said Wednesday, as Europe's top export power feels the pinch of slowing growth in China and other emerging markets.

Factory production fell 1.2 percent compared with a month earlier, corrected for seasonal factors and inflation, the ministry calculated.

The decline was much steeper than a 0.1 percent fall predicted by financial services firm FactSet.

And it did not yet factor in the Volkswagen (Other OTC: VLKAF - news) scandal sparked by news in September the auto giant has cheated on emissions tests in 11 million diesel vehicles, denting the 'Made (Paris: FR0010328302 - news) in Germany' brand.

Manufacturing output dropped 1.1 percent month-on-month in August -- which the ministry blamed in part of the timing of some state school holidays -- and construction and energy output also fell.

"The German industry is still struggling to gain momentum," said Carsten Brzeski, chief economist at ING-DiBa.

"The August drop marked the first decline for two consecutive months since the beginning of the year."

The data was released a day after news that German industrial orders, a key measure of demand for goods, had declined 1.8 percent in August, the second monthly fall in a row.

Weakness in domestic demand as well as from outside the eurozone had contributed to the slump, according to the preliminary data released by the federal statistics office Destatis.

- 'No need to panic' -

Brzeski said although German industrial production has remained flat since late last year, "there is no need to panic".

"Just remember last summer when the German industry went through a similar period of weak data," he wrote in a note.

"In the end, the batch of disappointing data was rather the result of too many Germans enjoying too much vacation than the beginning of a downward trend. Let's hope that history repeats itself."

Jennifer McKeown of Capital Economics also said that "looking ahead, there are reasons not to be too pessimistic about German industry".

"August?s fall in output partly reflected the timing of summer holidays," she wrote.

"And while the drop in capital goods production may well have related to the slowdown in China, we suspect that this has already passed its worst."

However, she added, "the Volkswagen scandal and its effect on the German car industry is a downside risk to growth going forward".

Commerzbank (Xetra: CBK100 - news) analyst Ralph Solveen agreed that the main reason for the drop in output was "the relatively late timing of the summer holidays in many federal states, which depressed production in the automotive sector especially".

"That said, the production trend has generally been sideways in any case without this effect in past months. Real GDP will probably rise less in the third quarter".