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Economy in Brief

Euro area Industrial Production Shows Some Signs of Topping
by Robert Brusca May 14, 2007

Industrial production in MFG in the Euro area in March rose by 0.3%. But the chart shows that a deceleration is underway. Yr/Yr growth is steady at just under 5.3%. But over the last three months output has lost momentum.

The table shows that consumer durables and capital equipment output weakened in March after a strong February showing, slowing the 3-month rate of growth sharply for overall production. Still, growth has only dropped off to a nearly 3% pace from 5% or more previously.

Key EMU countries continue to show strength. The three-month growth rates for output in Germany are still very strong at 8%, France’s 3.5% is a slight acceleration, while output has fallen off sharply in Italy declining at a 5.5% pace. In the UK three-month growth rates for output are negative for 3-mo and for 6-month horizons.

Capital equipment continues to be the leading sector. Consumer output is trailing and is showing no signs of pick up.

The ratio of capital goods output to consumer non-durables output is a directional signal for IP. Note how good the tracking is in the graph to the right. The capital goods sector is the leading sector for European economies. The R-square relationship of this ratio to overall IP growth is 0.67. That’s impressive for this type of indicator. For the moment, the ratio has stopped rising.

For the first quarter IP is still strong. MFG IP is growing at a 5.6% pace. The consumer sector is up at a 2.5% pace, intermediate goods at a 6% pace and capital goods at a 7.8% pace. But all may not continue to be so well…

The President of the EU business association, Business Europe, was quoted as saying on Monday that the strong euro was not causing a slowdown in the European economy. However, also on Monday the European Parliament issued a statement saying that upward trend in the Euro's exchange rate is not sustainable for the euro area's economy. Accordingly the Parliament’s draft report is to be debated in the Economic and Monetary Affairs Committee before being presented to ECB President Jean-Claude Trichet. Another interesting development was in the UK. There, Arm Holdings, the Cambridge-based designer of semiconductors, an industry whose global currency is dollars complained of an ongoing too-strong currency impact. Warren East, chief executive, estimates that the dollar has wiped £1bn from the company’s stock market value. He claims that the last ‘three years’ have been pretty horrid, not just the recent period when the pound and euro both have surged against the dollar. He maintains that seeking a cost base in the weaker dollar is the only solution. Surely, these observations are not compatible with a continuation of the strength we have seen in EU industrial output especially for capital equipment. We will be looking at the ratio of Capital goods IP to consumer nondurable goods IP as an indicator in the months ahead as well as at general IP trends.

Euro area and UK IP and MFG
Saar except m/m Mo/Mo Mar-07 Feb-07 Mar-07 Feb-07 Mar-07 Feb-07
Ezone Detail Mar-07 Feb-07 Jan-07 3-Mo 3-Mo 6-mo 6-mo 12-mo 12-mo
  MFG 0.3% 0.5% -0.1% 2.9% 7.1% 5.8% 2.8% 5.3% 5.7%
  Consumer 0.6% 0.0% -0.3% 1.1% 3.0% 4.0% 2.0% 3.3% 2.5%
    Consumer Durables -0.2% 0.6% -1.5% -4.2% -0.1% 2.7% -3.5% 3.9% 5.0%
    Consumer Nondurables 0.7% -0.1% -0.2% 1.5% 3.6% 4.1% 2.3% 3.1% 2.1%
  Intermediate 0.5% 0.7% -0.6% 2.4% 9.2% 7.0% 1.4% 6.3% 7.2%
  Capital 0.0% 0.9% 0.3% 5.0% 8.2% 6.7% 5.5% 6.4% 7.3%
Memo: MFG                  
  Germany: 0.3% 0.8% 1.0% 8.8% 7.7% 8.0% 6.7% 8.6% 8.1%
  France: IP excl Construction 0.2% 1.2% -0.5% 3.5% 7.2% 3.3% 1.6% 1.1% 2.5%
  Italy 0.4% -0.2% -1.6% -5.5% -0.8% 4.0% 0.2% 2.5% 2.2%
  Spain 1.9% -5.2% 9.3% 24.2% 2.3% 12.8% -1.8% 3.1% 5.3%
  UK 0.6% -0.8% -0.1% -1.2% -3.1% -0.6% -1.5% 0.9% 1.1%
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