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Economy in Brief

German IP Turns Lower in August
by Robert Brusca  October 7, 2022

German industrial production in August fell by 0.8% as consumer goods output increased by 1.8%, capital goods output increased by 1.2%, but intermediate goods output fell by 2.4% month-to-month. In July output had been flat with output declines of 2.2% for consumer goods, 0.1% for capital goods and 0.5% for intermediate goods.

Sequential growth rates for German output do not reveal a clear sequential trend, but the path clearly is weak. Over 12 months output is up by 2.5%; over six months it's falling at a 5.7% annual rate. However, over three months output is rising but only at a 0.4% annual rate – rise that breaks the declining trend but still a weak rise.

Sector trends sequentially
Sequentially consumer goods output falls by 0.1% over 12 months, falls at a 7.7% annual rate over six months then gains at a 0.4% annual rate over three months. Capital goods output fares much better with a 10.4% gain over 12 months, a 2.4% annual rate increase over six months and with a strong acceleration of 14.1% annualized over three months. Intermediate goods output shows clear weakness. It is declining by 2.2% over 12 months, which deteriorates to a decline at an annual rate of 9.8% over six months and that decline barely improves to an 8.8% annualized decline over three months. Intermediate goods output clearly is holding back output trends while capital goods is a sector trying to push things into the growth column.

Construction trends in Germany show deterioration with the decline of 2.4% for output in August, a decline of 0.9% in July and flat performance in June. Construction sequential growth rates show clear deterioration with growth of only 1.1% over 12 months, declining at an 11.7% annual rate over six months then declining faster at a 12.5% annual rate over three months.

Manufacturing output, demand, and orders
Output in manufacturing shows the same mixed trend as the headline but with a little bit more lift over three months; the growth rate of 3% compares to a growth rate of 3.6% over 12 months. However, real manufacturing orders that fell in August by 2.4% continue to show slippage with a decline of 4% over 12 months, a decline of 14.1% at an annual rate over six months and a decline that is trimmed to a 3.4% annual rate over three months. Real sales in manufacturing are a relative bright spot increasing in August by 1% and increasing in two of the last three months, generally. Sequentially, real manufacturing sales are up by 7.6% over 12 months, up by 0.4% at an annual rate over six months but then accelerate to a 9.7% growth rate over three months. Demand is holding up better than output and much better than orders – at least for now.

German industrial indicators are weak
German industrial indicators show weakening trends. The ZEW current index registers a - 47.6 net diffusion reading in August compared to a -45.8 reading in July. The IFO manufacturing reading ticks higher in August to 90.4 from an index reading of 90.3 in July although both of those are below the 93.6 reading in June. Expectations for manufacturing from the IFO show a slight uptick in August compared to July with a reading of 83.5 but that's still significantly weaker than the 87.3 reading for June. The EU Commission industry net diffusion index for Germany falls to 7.5 in August from 10.9 in July and 14.9 in June. Looking at the sequential averages of 12 months to six-months to three-months, each one of these measures weakens over that profile. In addition, each one of these measures weakens on a quarter-to-date basis; as of August, that's with two months into the current quarter completed. The ZEW index shows a decline of 11 points in its net index readings QTD. IFO manufacturing shows a decline of 2.6 points; IFO manufacturing expectations are down by 2.9 points. The EU Commission industrial index is down by 6 points. All of these are on a quarter-to-date basis.

Other Europe trends- EMU members
For in Europe, we have industrial output readings in manufacturing for EMU members France, Spain, Ireland, and Portugal and for European countries Sweden and Norway. The EMU members show increases in August for all four of them but that follows declines in July for all four of them. Over three months, among the EMU member countries, only Spain shows an output decline and a fairly hefty one at a 12.8% annual rate. However, sequential growth rates for industrial production from 12-months to six-months to three-months show a clear acceleration process for France. That is opposed by a clear deceleration process in Spain with mixed conditions displayed for Ireland and Portugal; both of which show output increase from 12-months to six-months and then slowing from six-months to three-months. Quarter-to-date, however, three of the four European Monetary Union members show declining industrial production. France shows the lone increase at a 3.6% annual rate, while Spain shows a decline at a 24.7% annual rate, Ireland shows a decline at a 16.3% annual rate, and Portugal shows that a small decline at a 0.5% annual rate.

Non-EMU Europe
For the other European countries in the table, Sweden and Norway both showed declines in output in August but those follow increases in both June and July. Sweden shows a tendency for output to decline logging 2.1% annual growth rate over 12- and six-months compared to a larger 5% decline when annualized over three months. Norway shows acceleration as output declines by 0.9% over 12-months, increases at a 0.9% pace over six months then accelerates to a 2.4% annual rate over three months. On a quarter-to-date basis, output in Sweden, however, is stronger than in Norway despite the trends. Swedish output is rising at a 12.3% annual rate QTD, while Norwegian output is rising at just a 1.4% annual rate.

These statistics are better than what you might expect to see having previously previewed PMI indexes for Europe. August’s production does not show unequivocal weakness, but it does show general weakness and conditions still appear to be deteriorating. The clearest case for weakness comes from the quarter-to-date data that show declines in all the German indicators as well as declines for the headline IP and for total manufacturing output, as well as for real manufacturing orders. However, even there the exception is strength in real sector sales in Germany. For most of the European Monetary Union, output is also declining on a quarter-to-date basis.

Challenges ahead
Europe continues to face challenges with the European Central Bank raising rates and with inflation high and remaining stubborn. The war in Ukraine is an added problem and the disabling of the Nord Stream pipelines makes it clear that Europe needs to find alternative sources of energy with winter coming. Energy availability is going to become a bigger issue especially as we get into the winter months. That, of course, also throws the spotlight on the ongoing war between Russia and Ukraine that for the time being shows Ukraine pressing its advantage and pushing Russia back. However, Russia is saber-rattling and continues to mention the potential for use of nuclear weapons and that, of course, does nothing to bolster confidence anywhere in Europe.

On balance, geopolitical trends remain difficult. OPEC-plus has just agreed to cut back its output trying to put some more pressure back onto oil prices that had been declining and raising the ire of the United States, potentially creating some conflict between the United States and Saudi Arabia and OPEC-plus. Beyond that, economic trends are mostly weakening particularly on the quarter-to-date basis. Monetary policy in Europe and the U.S. continues to be tight and still has more tightening ahead of it based on current inflation trends. With OPEC-plus taking steps to reinvigorate oil prices, it would appear that the easy progress from declining oil prices may already be nearly at an end at least until or unless recession sets in and drives demand and oil prices lower. That appears to be what lies ahead. It would be hard to imagine getting out of this situation without running recessions now. Markets are understanding and bracing for that eventuality.

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