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Economy in Brief

EMU IP Strength Comes and Goes...Is It Coming or Going?
by Robert Brusca  January 12, 2022

EMU IP (headline series, excluding construction) rose by 2.3% in November following a series of monthly drops of 1.3% in October, 0.9% in September and 1.7% in August. Still, it was enough of a gain in November to nudge the three-month growth to a positive if weak 0.4% (annualized) rate. This follows an annual rate drop of 1% over six months and a drop of 1.2% over 12 months. That sequential pattern reveals an acceleration in IP is in place but looking at the monthly profile it does not look impressive or even true. This is a case of the ‘chips’ falling just right to make the acceleration occur, but there does not seem to be enough here to convince anyone that conditions really are improving. Too much of the three-month growth rate depends on the spurt in November alone. The year-on-year trends are mostly still decaying.

Manufacturing follows in the footsteps of the headline series with a November gain of 2.4% that offsets a series of declines in earlier months. Manufacturing creates a sequential series over the past year showing a technical acceleration is under way just as the headline series does.

Sector news
By sector, consumer durable goods underpin that acceleration with an annualized double-digit gain in output over three months well in excess of its 12-month growth rate but still durables have no clear sequential pattern as their growth weakened over six months. Consumer nondurables undermine the overall accelerating trend with sequential deceleration in train. Intermediate goods do not make a clear pattern but show a solid 1.5% annual rate gain over three months; yet, that is weaker than its 1.8% gain over 12 months. Capital goods form the backbone that supports acceleration in the sector with a powerful 5.4% annual rate increase over three months that steps up from a drop at a 2% pace over six months and that is a sharp improvement over the 8.7% decline over 12 months.

Quarter-to-date assessments
In the QTD (quarter-to-date) period, overall output is up at a strong 6.9% annual rate on output increases everywhere except for consumer goods overall and consumer nondurables.

On a longer timeline, looking back at the output change since Covid stuck, output in the EMU is lower by 0.6% despite solid gains in all the sectors except for capital goods. Capital goods output is lower from January 2020 by 5.4%, dragging down overall industrial performance.

PMIs are erratic
The manufacturing PMIs, as noted in the table, were higher in November, lower in October and higher in September showing some volatility. Sequentially, the EMU manufacturing PMI is net lower over three months on average compared to its level over six months on average and it is net lower over six months compared to 12 months as well. That result scores points against the notion of an acceleration in output.

While there are some metrics that show IP on a bit of a revival, the details of this report show a lot of irregularities.

IP by country in Europe
There are 13 countries reporting IP on the early side in this table (11 are EMU members) and among those 13, six show monthly increases, and six show monthly declines and one is unchanged. The monthly gain in overall IP is 2.3%, but the median among the 11 EMU members in the table is a gain of 0.1%. That tells us that the gains in output are skewed to occurring in the large countries in November. But the median change also shows a gain in October and September when the headline series contracted. The median seems to paint a steadier picture of manufacturing performance. Median gains show a stronger increase over three months than over 12 months but with a sagging result in between. The median measure advocates for an optimistic pro-growth take on the EMU. This is borne out by the sequential results across the EMU as well as the fact that only four EMU members show output declines over three months, only four show declines over six months and only three show declines over 12 months. Most EMU members are showing output growth. Among the reporting EMU members, only Spain and Portugal show output steadily accelerating. Only Belgium shows sequential deceleration.

QTD at the country level
However, in the quarter-to-date, the assessments are not as strong. EMU members show five declines in output in Q4 relative to the average of the previous quarter; that compares to six countries that show output gains. The median gain in the QTD period is 6.7% and the headline shows a gain of 6.9%. That similarity suggests that quarter-to-date developments are more or less equally occurring across economies large and small. And that despite poor diffusion, output gains are the order of the day.

In the top panel of the chart, we saw that all sectors except capital goods showed expansion from January 2020. Despite that, there is a mix of results for EMU members on a QTD basis with five showing overall manufacturing output declines since January 2020 and six showing net gains.

What about Covid?
Of course, the story remains one of, "What about Covid?" A report on Bloomberg news quotes a WHO source expecting that half of the EMU will have been infected with Omicron in six to eight weeks. However, this sort of dire-seeming story is balanced by another report that says Spain is considering treating Covid like something that is endemic, like the flu since it is so transmissible and since its tendency to cause death is so reduced compared to earlier variants. None of that really tells us what the impact on economic activity will be in the coming months. The World Bank has cut its global forecast for the period, as follows:

The World Back "said global growth is expected to decelerate "markedly" to 4.1% in 2022 from 5.5% last year, and drop further to 3.2% in 2023 as pent-up demand dissipates and governments unwind massive fiscal and monetary support provided early in the pandemic." (Source here).

The World Bank sees a combination of pandemic and an easing of special stimulus as well as less catch-up spending deflating growth prospects in the coming years. While the reduction of the fiscal measure is somewhat easier to quantify, the impact of changes in the virus and in attitudes toward it – both official attitudes as well as the behavior of the general public- are effects that are much harder to know and to capture.

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