German industrial production contracted by more than expected in August as record oil prices and summer holidays dented output at factories and utilities, preliminary Economy Ministry data showed on Friday.
Output fell by a seasonally adjusted 1.6 percent from July. This was the first drop in three months, but followed two sizeable gains in output during June and July, and economists said German industry was still performing well.
The mid-range forecast of 40 economists polled by Reuters last week was for a drop of 0.5 percent. Forecasts ranged from a fall of 1.8 percent to a rise of 2.0 percent.
Postbank economist Heinrich Bayer said that following strong gains in previous months, the drop in August was not a surprise.
"High oil prices, the base effect after the recent months' gains and holidays all seem to have played a role," he said.
"But we don't expect a trend reversal, rather we see this as a one-off. We expect the medium-term trend to remain positive now that we have overcome the dip in spring."
Between mid-July and the end of August, the price of a barrel of oil rose from around $55 to over $70.
Manufacturing output fell by 1.7 percent in August, with energy production dipping by 2.3 percent. However, construction output climbed by 1.1 percent, the third straight rise.
"That could be a glimmer of light on the horizon - or at least show that the construction sector is stabilising," said MM Warburg economist Carsten Klude in Hamburg.
The German construction sector has been stuck in almost perpetual recession since the post-reunification building boom ended in 1995, dragging down growth in the overall economy.
On Thursday the country's HDB industry group forecast construction sales would fall by up to six percent this year, more than first expected, but also said that growth could return in 2006 if reforms were passed and investment maintained.
In a statement, the Economy Ministry said that despite the August fall, industrial output was still on an upward path.
"Overall, the mood in German industry has picked up during the past months despite high oil prices. In addition, the fall in the euro (against the dollar) this year has helped German firms to be more competitive internationally," it said. "Thus the rise in economic activity should continue in coming months."
Leading indicators had forecast a drop in industrial activity in August, with the BME/NTC German manufacturing PMI falling to its lowest level in over two years in the month and the Ifo institute's business climate index also dipping.
However, oil prices are now more than 10 percent lower than they were in late August and both the Ifo index and the manufacturing PMI improved markedly in September.
Manufacturing orders also fell sharply on the month in August, but this followed one of the biggest three-month surges in new business of recent years. Orders were still up by over five percent on the year in August.
While retail sales declined for three straight months up to August, car registrations have risen for six months.
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