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Economy in Brief

Euro Area IP Drops in August -Will There Still Be Better Times Ahead?
by Robert Brusca  October 13, 2021

Industrial production in the euro area fell by 1.6% in August following a 1.4% gain in July. This is only the third monthly drop in nine months. Production fell broadly in all major sectors consumer goods, intermediate goods, and capital goods. Output also fell in each subsector for consumer goods: for durables and nondurables. The largest drop on the month was for capital goods where output fell by 3.9% month-to-month.

The capital goods sector has been struggling in the wake of Covid to get back into gear. Some of that may be because output is not back to its past peak (output peaked at end-2017 reaching a level that was about 6% higher than it is now). If there is industrial slack, the need for more investment is not as pressing. There are further issues that might affect investment demand and demand for capital goods as well. One is that Covid has impacted industry globally and may be changing how global supply chains are going to be configured. If that comes to fruition, there could be an increase in demand for capital goods eventually. But until firms sort out what they want, investment could continue to suffer. Right now, supply chain issues have created shortages especially for computer chips. Chips are key inputs into many products. The lack of key inputs could make investment seem less attractive if production is hampered by a lack of inputs. There also are labor supply and overall demand issues related to the still present Covid virus and its impact on both supply and demand. Solving the global supply chain problem is not a simple matter of just getting more investment; changes may be needed, and change takes time.

Different aspects of this problem are going to be more important in different places. There is no single reason that demand for capital goods is weak. But the fact that output so far below its past peak is certainly a compelling reason and the problems with supply chain is another.

Not only is output adversely affected across a wide variety of economic sectors, but it is also erratic geographically in the EMU. Of the thirteen countries in the table, nine show output drops in August. This is after only three countries showed output drops in July. Still, seven of the nine IP drops in August are of 1% month-to-month or more. Among the big four EMU economies, only Italy (-0.1%) and Germany (-4.6%) had an output drop in manufacturing in August with France (1.1%) and Spain (2.7%) logging output increases.

The August drop has affected momentum by reversing a 0.4% annual rate rise in output over six months and turning it to a -0.4% annual rate over three months. Combined with a 4.8% output gain over 12 months, the EMU has output on a decelerating path from 12-months to six-months to three-months. Over three months, the only sector with output increasing is consumer goods. A 21.7% annual rate surge in nondurables helps to boost overall consumer output. That gain swamps the -10.9% hit from durables production. But intermediate goods output is at a -3.4% annual rate and capital goods output is at a -10.6% annual rate. Capital goods and intermediate goods mark ongoing decelerations on the timeline from 12-months to six-months to three-months.

Despite these decelerations, output continues to grow strongly over 12 months. Every EMU country shows year-on-year output growth for manufacturing except Malta and Portugal. Only four countries have output lower over six months and only four have output lower over three months (However, Germany is one of those and it has output lower over both three-months and six-months and it has the fourth weakest year-on-year gain among the EMU reporters in the table.).

The EMU still has output below its level of January 2020. So, it is not only below its earlier, 2017 peak, but it has not recovered from the hit by Covid in early-2020. Both total IP excluding construction and manufacturing production are 1.1% below their, respective, January 2020 levels. However, all manufacturing sectors are back above their January 2020 levels except for capital goods. Among the 13 reporting countries, five are still below their January 2020 level of output and Germany is one of those. Portugal, Malta, and Germany languish below their, respective, January 2020 levels the most while Belgium, Ireland, and Greece have recovered the most.

On a shorter timeline, in the quarter-to-date (QTD), there are two of three-months data now in for the quarter at hand. Output is growing over its Q2 base in the third quarter at a 1.5% pace overall and at a 2.1% pace for manufacturing. For all of the EMU, consumer durable goods output, intermediate goods output and capital goods output all are falling in this QTD period. Six of thirteen EMU members are showing output declines at this stage of Q3 and one of those is Germany, the largest EMU economy.

Globally manufacturing PMIs have weekend slightly in August and September. For the EMU, the manufacturing PMI is still at a strong level, but it has eased lower for three-months in a row. However, the good news underlying these uneven trends is that the most recent covid wave of infections is breaking and a period of improved growth could lie ahead. Despite the uneven trends, there is still reason and room for optimism as long as policy does not take a sharp shift for the worse. The concern on that front is that inflation is rising and so far, central banks are not reacting to it. The second concern is the fiscal help is being, or will be, withdrawn with some potential for an adverse economic effect.

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