EMU IP Set-back in June

Consumer goods output in the European Monetary Union has been expanding since the second quarter of 2024; however, that has not been enough to bring expansion to output overall. Intermediate and capital goods output continue to be under duress. In June, overall IP output fell by 1.3%, manufacturing output fell by 1.6%, and the consumer goods sector, which has been the core of strength for output, declined on the month by 4.3%. Capital goods output fell 2.2% and the output of intermediate goods fell by 0.2%. All in all, it was a tough June for the industrial sector in the European Monetary Union.

Sequential growth rates Industrial output excluding construction gained 0.5% over 12 months, rose over six months at a 2.5% annual rate, and then experienced a sharp decline over three months as output fell at a 10.3% annual rate. Consumer goods output gained 5.1% over 12 months but declined at a 1.8% annual rate over six months and fell at an 8.6% pace over three months; both consumer durables and nondurable goods output are sharply lower over three months. Intermediate goods output fell by 1.9% over 12 months; it's flat over six months and then dropped at a 10.7% annual rate over three months. Capital goods output fell 2.2% over 12 months, gained 0.4% at an annual rate over six months, then fell sharply at a 9.7% pace over three months. To some extent, this is a tariff-related trend as firms in Europe had cranked-up output to get goods out ahead of the tariffs and now that we are in the actual tariff period output is being cut back to trend and to account for the previous surge. So, the reductions in output appear a little more draconian than the actual weakness in the economy - these are still trends to watch, however.

Ranking trends for growth Ranking 12-month growth rates show us a great deal of weakness in the growth of manufacturing output. The headline for output excluding construction has a 51.4 percentile standing on data back to late 2007. This means over this period, the pace of the output gains is slightly ahead of its median. The median for ranked data occurs at a ranking of 50%. Consumer goods output has an 88.3 percentile ranking for its growth rate that is created entirely by a 90.7 percentile growth rate ranking for consumer nondurable goods, since consumer durable goods have only a 20.6 percentile ranking. Intermediate goods’ growth rate has a 37.4 percentile ranking and capital goods have a 24.8 percentile ranking. The annual rates of output growth are weak except for nondurables in the consumer sector. For manufacturing overall, the ranking is in the 41.6 percentile, below its median.

Output trends since COVID Not surprisingly, if we look at output gains compared to January 2020 before COVID struck, only total consumer goods output and consumer goods output of nondurables have levels of output that are greater than what they created in January 2020. Overall output, however, is close to maintaining its performance from five years ago with current output at 98.5% of what it was in January 2020; manufacturing output is at 98.8% of what it was in January 2020 as well. The most lagging component is intermediate goods where output is only 88.4% of what it was in January 2020. All of them are weak because they show output and not growth in over five years – except for consumer nondurables.

Country performance Among the 13 European Monetary Union members in the table for June, 6 of them show output declines in that month. That's an improvement from nine that declined in May and seven that showed declines in April. Despite the fact that overall output growth fell in June, the unweighted average across these reporting countries shows a median increase in output of 0.5% in June, up from -0.7% in May and -0.2% in April. The pooled country level statistics are not weighted for manufacturing or GDP importance. Germany continues to be one of the main reasons for economic weakness in the monetary union. Only Germany and Luxembourg show the declines on all three horizons of 12 months, 6 months, and 3 months.

Quarter-to-date The second quarter to date column which now is for the completed quarter shows the overall output and manufacturing output are declining on the quarter and in five reporting countries: Austria, Germany, the Netherlands, Malta, and Ireland.

Output growth by country The ranking of output growth shows rankings across these 13 countries that are above their median and data back to 2007 for all but four countries. However, one of those four lagging countries is Germany, and Germany's rank on the period is only in its 14th percentile – exceptionally weak. Germany, which has the largest manufacturing sector and is generally the powerhouse of Europe, is the main reason that the aggregate industrial production data for the EMU are so weak. Manufacturing in most of the rest of the monetary union is performing at a level better than its historic median; back to late 2007, there are only four exceptions, and Germany is the main one.

The monetary union took a bad turn in June but the report that was worse than expected. Output declined across all sectors in June as well. Country level performance was significantly weak. The German economy turned in a sharply weaker and particularly poor performance in June. The good news is that President Trump is meeting with Russia's Vladimir Putin with the objective to stop the war in Europe. Also, on the good news front, inflation in Europe has settled down. It's still over target but headline inflation is quite close to the 2% target set by the ECB and core inflation remains stubborn, but it doesn't show signs of rising.