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Economy in Brief

Europe's Industrial Healing Seems To Be Underway But What About The Rest Of The Economy?
by Robert Brusca  July 10, 2013

EMU-wide industrial production figures are not yet available. However, we have data available for wide group of the EU- and EMU- member countries. In the month of May, nine of these countries have already reported industrial production data with four of them showing month-to-month increases. In April the same group of countries showed month-to-month improvement in seven of nine instances in March there was month-to-month improvement in five of nine instances.

Germany, the largest country in the euro-Zone, saw its industrial output rise in two of the last three months. France, the second-largest euro-Zone economy, showed industrial production rise in one of three months. Italy, the third-largest country, say its industrial production rise in one of those months, go flat in the other, and decline in the third. Spain, the fourth largest e-Zone economy, saw industrial production rise in each of those three-months.

The chart at the top shows he industrial production path in terms of year-over-year growth rates for Germany, for France, and for Spain three of the four largest economies in the Eurozone. They are plotted on a same-scale chart and it's clear that industrial production has gone from being persistently negative year-over-year to closing in very close to a flat year-over-year performance for each of them.

Turning to data in the table, however, we see that Germany, France and Spain have some of the smallest year-over-year declines in industrial output among the currently-reporting euro-Zone members. And that would be true for last month as well when Germany posted 1.7% year-over-year increase France, a 0.3% decline and Spain a 0.7% increase; they were three of the four strongest economies in the table in April. As a result the chart of those top economies may slightly exaggerate the extent of progress in the Zone overall

However, as trends go it's quite clear that progress is being made. Over three months five of the nine countries show net increases in industrial production and the same is true over six months. If we look at the simple average of the various columns' percent changes, we see another hint of improvement in those metrics. However, let me warn that these are merely summaries of how countries are doing on average and in the euro-Zone we really need to look at weighted averages to know how the Zone is doing. E-Zone member countries are of very, very different sizes and therefore countries carry very, very different weights in the overall euro-Zone system. It is interesting and useful (for some purposes) to see how well member countries are doing,, but that does not always carryover to how the Zone itself is performing, even though the countries are Zone members..

We see the progress much more clearly if we look at what's going on in the quarter to date. We now have two months of hard data out of three available for the quarter. While that final month can always change things quite a bit, it seems quite clear that the euro-Zone is going to post a substantial increase in industrial production in the second quarter. The average increase right now is 3% for countries in the table. Germany, the largest economy, is growing at an 11.4% annual rate, France, the second-largest country, is going on at 8.7% annual rate Spain, the fourth-largest country, is growing at an 11% annual rate. Italy, the third-largest economy, will be detracting with the 5% annual rate of decline. With industrial production ramping up like this in the quarter it's a pretty good bet that we could see EMU GDP post a positive Q2 number.

Meanwhile, the European Union members that are not part of the single currency system whose data are in this table (see the table bottom) namely the UK, Sweden and Norway are not faring quite as well. All three of them showed industrial production declines in May, Two of three of them showed declines in April. In the quarter to date data two of them to show increases, the UK at a 0.5% annual rate and Norway at an elevated 8.9% annual rate, as compared to Sweden's decline at a -5.7% annual rate.

PMI data from Markit's PMI survey is indicating some industrial progress although clearly there is still a great deal of weakness exhibited in the industrial part of that survey. But the signal from the Markit indices seems to be largely on the money.

Still, if we look closely at the data in the table as well as at the trends in the chart, it's clear that while there may be some healing in train there is still a long way to go. Even for Germany, the strongest economy in many respects, recent data on industrial orders have not been as strong; moreover, after two months of increasing industrial output Germany posted a decline in May and its year-over-year increase in April turned to a decline in May. While the three-month and six-month trends show that there are more countries where output is increasing -not declining- the year-over-year data still show that eight of nine countries' output is still lower than it was one year ago. While we do like to look at sequential growth rates (the movement from 12-months, to six-months, to three-months) these trends can sometimes be illusory because of the volatility of the data. Still, when you see broad-based improvement like we are seeing in the euro-Zone it is more likely that this improvement represents something that's real rather than something that is ephemeral. But it may not be so clear what the reason is for the turnabout.

When we think about economic improvement we need to take a holistic approach. Either the whole body of the economy is getting healthier or the economy is not really getting healthier. The improvement of the industrial sector in an economy where everything else is still unhealthy will probably not last. Indications currently are that the EMU improvements are rather widespread with, of course, a great deal of variation across member countries. Too many countries are still dealing with ongoing austerity programs or, like France, are limping along without having made much adjustment to their ailing fiscal situation. For example, France seems to be doing better than United Kingdom however the United Kingdom has spent a lot more attention and effort a gaining control of its fiscal situation that has France. As we look to the future we would expect the UK have a stronger economy with more flexibility than we would expect from France quite apart from what the current growth rates seems to say at the moment. Indeed, the IMF has just upgraded growth prospects for the UK and downgraded them for France.

There are still political pitfalls throughout Europe. In France Hollande is still under pressure. In Italy Berlusconi is on his way out of the political limelight and it's unclear what role he will play in the background. Portugal has clear instability in its ruling faction. Greece is staying within 'a stone's throw' of its austerity requirements but it seems to be slipping and the consensus is that it will be in need of another haircut for bondholders sooner or later! Yes another. Cyprus is a land where the euro is not really a euro because if you got them on deposit in Cyprus you can't spend them anyplace else. And we continue to wait for the conclusion of the German elections. Angela Merkel still seems to hold a strong position but you never know what bit of news could become destabilizing. She has seen some local election losses and there are some hints that there could be negative fallout from the Snowden affair given his German linkages.

European banking reform continues to move ahead but in some ways perhaps with better headlines than substance. The new plan for bank bailout authority could be the law of the land soon but that will be moot since the fund the authority will use to affect bailouts will be filled by placing a tariff on banks and will not be big enough to use for another 10 years. So, good luck with that! On the monetary front, M2 money supply growth in EMU continues to snake up to about foreign half percent year-over-year. But loans to the private sector are still extremely anemic with a growth rate that is near zero and is on a declining trend.

When we look at the European industrial sector we may be looking at the best part of the European economy and that is somewhat surprising since the global recovery is weak and the most recent Chinese trade data show how badly China is being affected by weak global demand and its own structural changes.. Since industrial output involves tradable goods we might expect that the tradable goods part of the economy (manufacturing) would perform somewhat worse than the non-tradable goods part of the economy (services). Yet that's not how things are playing out. It's a reminder to all of us how much European austerity which works through repressing the domestic economy is still driving events in Europe. As weak as the global economy is, it seems to be the driving force for European recovery. And, as we look to the future, that is something to bear in mind.

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