German industrial output rose more than expected in May

By Maria Martinez

July 7 (Reuters) - German industrial production rose more than expected in May thanks to the automotive industry and energy production, the federal statistics office said on Monday.

Production rose 1.2% over the previous month, while analysts polled by Reuters had predicted it to be flat at 0%.

"It's too early to give the all-clear, but signs of at least a cyclical rebound, albeit from low levels, are increasing," said Carsten Brzeski, global head of macroeconomics at ING.

Still, in the near term, he said the downside risks have increased due to ongoing trade tensions, a stronger euro, and a dry and hot summer so far which has brought water levels in Germany's rivers to very low levels for the time of year.

The increase in May could mean that the manufacturing sector is on a path to recovery, said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.

While production levels are still well below those seen after the initial post-pandemic recovery phase, there has been upward momentum for several months, de la Rubia said.

Production in April and May was slightly above the average of the first quarter, fueling hopes that industry has turned a corner, said Ralph Solveen, senior economist at Commerzbank.

While gross domestic product is hardly expected to grow in the second quarter, growth should continue in the following quarters, by policy changes that will provide a significant boost next year at the latest, Solveen said.

The German government has approved a tax relief package to stimulate investment and bring the economy back to growth after two years of contraction.

Production in May was buoyed by growth of 4.9% in the automotive industry from April and by 10.8% in energy production.

The increase in production in the pharmaceutical industry by 10% in May also had a positive impact on the overall result.

The better-than-expected German industrial production figures for May are partly due to continued tariff front-running in the pharmaceuticals sector, said Franziska Palmas, senior Europe economist at Capital Economics, referring to the U.S. buying more from Germany before new tariffs take effect.

However, output in other sectors is also proving more resilient to tariffs than expected, Palmas said.

The less volatile three-month on three-month comparison showed that production was 1.4% higher in the period from March to May than in the previous three months.

The statistics office also revised the figure for April to a 1.6% drop in production, more than the 1.4% decline in the provisional figure.

German industrial orders fell by 1.4% in May, ending a recent pickup, due to a slump in demand from within the euro zone, data showed on Friday.

Industrial orders remain weak and the rapid appreciation of the euro over the past few months will weigh on production in the near term, Palmas said. (Reporting by Cian Muenster in Gdansk and Maria Martinez in Berlin; Editing by Ludwig Burger and Bernadette Baum)