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Economy in Brief

EMU Industrial Production Sinks in December
by Robert Brusca  February 12, 2020

EMU industrial production is under pressure. Output fell by 2.1% in December after being flat in November. The last increase in IP month-to-month was in August of last year. Output is falling at rates of growth that have gotten progressively weaker for both overall IP and manufacturing IP from 12-months to six-months to three-months. Both overall and manufacturing IP are declining at double-digit annualized rates of growth over three months.

Sector trends
In manufacturing over three months, there are declines in all major sectors consumer goods overall, as well as subsector consumer durables, subsector consumer nondurables, capital goods and intermediate goods. Capital goods output is now declining in a major way at a -21% annual rate over three months. All sectors also have output declining over six months as well. Over 12 months, only consumer output is advancing on the back of an increase in the subsector consumer nondurables. In the quarter-to-date, declines are present for overall IP, manufacturing, intermediate goods and capital goods, with consumer output and its two subsectors showing advances.

Country trends
In December among the 11 EMU member countries, seven show declines in output. Two of three reporting non-EMU countries show output increases. In November seven also showed declines and in October 8 showed declines. And the output decline of the median country among these EMU reporters has gotten progressively larger from October to November to December.

The three-month decline in manufacturing IP across EMU members in the table shows declines in seven of them. Five of them are in double digits and the two that are not in double digits round 'up' to a double-digit decline. The weakness over three months is severe and widespread. Portugal fights that trend and is the sole member in the table with both output increases over each horizon with output acceleration as well (Malta also has persistent output gains over 12 months six months and three months, but they are not accelerating).

Six EMU members show output declines over six months. Only Ireland and Luxembourg log declines at a double-digit pace. And Dutch output is dead flat over six months. Five of 11 EMU economies show declines over 12 months; Germany's decline is the largest with a drop of 7.4% over 12 months.

The other three non-EU reporters in the table show declines over three months with two of three posting declines over six months and 12 months. Norway is the exception with output increases over 12 months and six months followed by an output decline over three months.

On a quarter-to-date basis, output declines permeate all the countries in the table except for three EMU members (Spain, Malta and Portugal).

The median decline among EMU members gets increasingly severe on shorter horizons from 12-months to six-months to three-months. The median decline among EMU members for three-months is -9.9%, essentially at double digits.

These data portray a great deal of industrial weakness. The chart shows that the Markit manufacturing PMI has tracked the decline in the IP index rather well with more or less the same timing in this cycle.

EU Commission report allows us to use diffusion indexes in a long comparison back to 1989 to gain context by which to evaluate performance. The EMU industrial index shows substantial weakness leading EMU lower. The EMU overall standing is in its 55th percentile driven lower substantially by a weak 38th percentile standing in manufacturing. Construction is still quite strong at a 97th percentile standing; retailing has an 82nd percentile standing; consumer confidence has a 62nd percentile standing; and services have a 57th percentile standing. The bottom line is that while manufacturing is looking extremely weak on output losses across countries and across industrial sectors, that weakness has not generally dragged the entire economy down to the same depths as manufacturing – although it has weakened conditions overall. Still, the EU indexes point to some respite coming in January.

The rank standing by sectors and countries is presented below drawn from a timeline back to 1996. This level of detail shows several key trends. The first is a point about sectors: that even by country the weakness in industry is widespread. Only Spain (and Spain barely…) has a reading above its own historic median reading on the industrial survey- that metric refers to readings above the 50% level. At the other end of the spectrum, construction is firm to very strong across countries. Next there is an observation about countries: only Spain and the United Kingdom have more than one sector (excluding the overall sentiment reading which contains the manufacturing reading) below its historic median. Third, in the IP report we saw that consumer goods output has been the most resilient among manufacturing sectors. In this table, we see that retailing has firm-to-strong readings across countries with the U.K. (not an EMU member) as the only exception. So the consumer does seem to show some real resilience that feeds through to support manufacturing (even though not all of the output created in the EMU will stay in the EMU). The four largest EMU economies (unweighted) showing the strongest readings in order are in construction, retailing, services, consumer confidence and industry.

Above we have married data from different reports on the same industrial themes and brought other sectors into the analysis to see how industrial weakness may have spread or been countered. The IP data show weakness; EU Commission readings extend the comparison to conditions prevailing back to early-1990. The small table above combines some of the length of the EU commission data with country detail. The upshot of this checking and cross-checking is to confirm that there is a great deal of weakness in the EMU and that the weakness cuts across countries and manufacturing industries. In addition, there is evidence of weakening in other sectors. And while construction remains extremely strong, there has been clear weakening in retail, services and consumer confidence. So far, retail seems still quite solid. But the European economy does not look strong.

The coronavirus will weaken the global economy further. There is still a U.K.-EU bargaining process over post-Brexit conditions. The U.S. has already begun to make noises about wanting some changes on the trade front, quite apart from the entanglement over the notion of a digital tax proposed in France and how that will affect U.S. technology firms. The point is that manufacturing may not be the whole economy, but it does have a huge impact on growth and we are seeing the spread of manufacturing weakness. Clearly, that is something that cannot continue if recession is to be avoided. There, I used that word, 'recession.' To avoid slipping into one, the weakness in manufacturing is going to have to abate. That is clear. And yet for the time being, risks to manufacturing are still high and spreading.

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