German industrial production unexpectedly dropped in December. On a monthly basis, German production fell by 2.9% M/M, the biggest drop in almost three years, while the consensus was looking for stabilization. The previous figure was modestly upwardly revised from -0.6% M/M to 0.0% M/M. The details show that weakness was broad-based in December as production fell in the manufacturing (-2.7% M/M) and construction (-6.4% M/M) sector and also energy production dropped (by 2.2% M/M). Within the manufacturing sector, weakness was led by capital good (-3.6% M/M), but also production of intermediate (-2.4% M/M) and consumer (-0.9% M/M) goods weakened in the last month of the year. The outcome is disappointing as we had hoped to see signs of recovery after the improvement in business confidence indicators recently. It is now sure that production will be drag on German growth in the fourth quarter, providing further evidence that growth contracted in the final quarter of 2011.