By Geoffrey Smith

Investing.com -- Germany's industrial engine slowed considerably in July amid a toxic combination of supply chain problems and the reduction of Russian energy supplies.

Industrial production fell 0.3% on the month, a little better than the 0.5% decline expected, and was down 1.1% from a year earlier.

However, the figures were flattered by the fact that school holidays started later this year, meaning that the usual summer drop in output was smaller than it otherwise would have been. They were also supported by construction output, which rose 1.4%, and by energy production, which rose 2.8%.

By contrast, manufacturing output fell 1.0% and output from energy-intensive sectors, in particular, fell 1.9%, illustrating how much the sharp rise in prices for gas and electricity has hurt. Energy-intensive industries' output has fallen nearly 7% since Russia's invasion of Ukraine in February.

"For Germany’s industrial backbone, small and medium-sized enterprises, higher energy prices look like a ticking time bomb," said ING's Carsten Brzeski in a note to clients, although he noted that the sector still hadn't "fallen off a cliff."

"With ongoing pressure on consumers’ disposable incomes, companies’ pricing power is fading," he added. "It is remarkable that the government’s third relief package presented on Sunday provided only very limited support for this segment of the economy."

Statistics office Destatis noted that industry continues to suffer not just from the effects of the war, but of the supply chain disruption caused by COVID-19 and, more recently, by the drought that restricted shipping on Germany's most important inland waterways such as the Rhine.

Manufacturing production fell across the board, with consumer goods output down 2.4%, due not least to the food and drink sector. Capital goods output fell 0.8%.

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