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Economy in Brief

German Production: A Withering Rebound
by Robert Brusca  October 7, 2021

Past is not prologue in the Land of Covid
Headline IP growth statistics for Germany show a withering rebound as IP is still up by 1.6% over 12 months, but over six months it is at a -5.5% pace and over three months the drop is a further escalated -13.9% annualized. However, whether this trend takes hold of production and continue to drive output lower on not will depend mostly on the resilience of the global supply chain and whatever new direction the Covid virus takes. Despite the clear signal in the trend, a signal that is fully echoed by manufacturing output alone, the past is not prologue in the 'Land of Covid.' We have learned to look at trends and to distrust them. Still, for now, this trend in not your friend and Germany is losing momentum at an accelerated pace.

Sector stories
As we have seen elsewhere for orders and in other countries, manufacturing trends show continued withering for intermediate goods and for capital goods. But for consumer goods the pattern for output is less clear. Capital goods output is a net negative over 12 months. Capital goods and intermediate goods report net negative results over six months and three months. But for consumer goods, output is expanding on all horizons. However, it is not accelerating. And output over three months is slightly weaker than it is over 12 months when annualized. So, the trend picture for consumer goods output is quite mixed. The sector has been resilient. And this is largely because of programs geared to maintain worker incomes during the outbreak so they could maintain spending and support some lifestyle. But capital goods output is all about firms' decisions to invest and about the system's capability to follow through on those decisions. Intermediate goods are tied a bit more to supporting what is happening here and now rather than to the future. But only consumer goods output is showing enough resilience to continue to expand.

Other metrics
Orders and sales: Real manufacturing orders fell hard in August but have continued to show positive growth sequentially- although six-month and the three-month growth rates lie well below the 12-month growth rate indicating slowing of not persistent deceleration. Real sales have declined sharply in the current month and show a deceleration sequentially amid unrelenting negative rates of growth on all horizons.

ZEW: The ZEW index goes the other way. It shows net negative value over 12 months and six months but has a positive reading over three months and much stronger readings in July and August than in June.

IFO: The IFO survey shows increasing headline metrics from 12-months to six-months to three-months. But this progression gives way to sharp step back for manufacturing in August. IFO expectations have an inconsistent trend from 12-months to six-months to three-months. They, too, backtrack sharply in August and fall back over the most recent five-months running.

EU Commission industrial index: The EU Commission index is wholly upbeat. It shows increases in value from 12-months to six-months to three-months. It also increases month-to-month for eight months in a row, an unusual, powerful, signal (and quite contrary to IFO expectations!).

IP in other countries
France, Spain and Portugal report output out on the early side as well. France shows an accelerating trend in output growth. Spain shows a decelerating trend in output growth. Portugal is an odd case; it shows steep output declines over 12 months and they worsen ever so slightly over six months then output goes dead flat over three months. The monthly trends do not help sort it out since they seem to show almost random monthly rises and falls. Portugal's trend is an enigma, but for now Portuguese industry is not performing very well.

Other horizons
The quarter to date (QTD): QTD output in August (two-months into Q3) shows a decline relative to the Q2 average. Two of three sectors decline with consumers goods (of course) the exception. Construction output, manufacturing output, and real sales fall QTD; real manufacturing orders make a strong gain. The ZEW index makes a strong gain QTD while the EU Commission index rises by a small amount. The IFO manufacturing index weakens as do the IFO expectations. France, Spain, and Portugal all log drops in the QTD period. The QTD horizon shows mostly weakening.

Since February 2020: The German IP index and all three sectors are still below their February 2020 levels. Construction output, manufacturing output and real sales are all below their February 2020 levels. Only real orders rise above their February 2020 mark with a gain of 8.5%. The industrial indicators are all above their February 2020 levels; ZEW, IFO manufacturing, IFO expectations and the EU Commission index are all showing solid to strong gains. But output in France, Spain, and Portugal is still below all their respective levels of February 2020. On balance, output since February 2020 is weaker, but indicators show there has been more progress than output alone can measure; strength in real orders adds to a more upbeat future assessment.

On balance...Covid dawn?
Summing up, there is a clear broad slowing in manufacturing output in Germany but not in the three reporting European countries in the table. Still, there is no impressive upward momentum outside one strong three-month period for France. Momentum gauges tend to be either negative or mixed, but generally with a negative tone. Industrial indicators are an exception to this with some looking quite strong and others mixed (only one is weakening and it is not weak). And, of course, real manufacturing orders pump out very positive signals except for the month of August.

Layered on top of all these trends are concerns about the global supply chain. Reports from businesses tell us that some large retailers are so concerned they have taken steps to charter their own ships to send merchandise to their preferred locations. Supply chain issues linger everywhere. While the virus is showing signs of breaking down from its recent wave and experts are for some reason optimistic that we have seen the worst of the waves (with some saying there will not be another variant…), Covid still circulates and will continue to be some sort of a factor going ahead. We just can't be sure how much of a factor it will be. For now, the trends look challenged, but the Covid dawn seems to be breaking.

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