German IP Sends Mixed Signals at Yearend

German IP slowed at yearend. After rising by a strong 2.3% in October, it gained 0.3% in November and then shed 0.3% in December. While that marks a clear slowing, sequential growth rates of a broader dimension find German IP at a -4.2% falling pace over 12 months, shrinking again by at a smaller -1.6% pace over six months but then rising at a strong 9.7% pace over three months. The three-month gain obviously is driven by that gain in October, not true sustained yearend strength. But such is the way that the numbers fall and the tale they tell. That explains why we look at them from so many angles: to find the true trend, not just the numerical one.

It is often said that the devil is in the details. Here, we find that the sector data show a devilishly convoluted pattern: some clear, some muddled, some contrary. The clear story is from capital goods, there, a 4.4% 12-month drop that gives way to 9.2% pace of growth over six months and a whopping 46.7% annualized gain over three months. German capital goods, the laggard sector since Covid struck (still 11% below its February 2020 level, in fact), is now the leading growth sector for German IP. That begins to look like a restoration of normalcy. But consumer goods and intermediate goods do not go along with that sharp sequential rebound as both show a muddled pattern of expansions and setbacks over this same set of intervals. The construction sector, like capital goods, shows a clear pattern, but it’s the opposite one from capital goods- a pattern of deceleration. Construction output is up by 0.3% over 12 months. The pace slips to the negative over six months then worsens over three months. Construction output ends the year with a 3.9% drop in December. The trend for German IP may be upward on sequential data, but that trend does not get overwhelming support from German sectors. Moreover, it hangs in the balance on one very strong sector.

Manufacturing output also show the same sort of acceleration as overall IP. But real orders for manufactured goods show a convoluted sequence of growth rates from 12-months to six-months to three-months. Real sales in manufacturing, however, show a progressive explosion of growth.

The indicators, like the ZEE current conditions survey, the IFO and the EU Commission industrial index, show mixed results. The ZEW index is convoluted. The IFO current and expectations readings show steadily eroding trends. The EU Commission index also is convoluted. However, in the quarter-to-date, all these metrics are weakening compared to one quarter ago. And all show net gains compared their respective February 2020 levels – unlike IP that is still lower on balance along with all its sectors. Construction also is weaker compared to its pre-Covid readings. The messaging from all this is unclear, but it is not bullish.

France. Portugal, and Norway are also early reporters this month of IP data. Portugal shows a sequence of monthly readings that has clear upward momentum unlike Norway or France. All three, however, show net declines in the quarter-to-date (quarter just completed) compared to a quarter ago. France shows sequential acceleration, Norway shows sequential deceleration and Portugal misses the designation of acceleration on a numerical technicality (14.5<14.8), but it clearly is and has been accelerating (14.5>0.4, by a long shot). And all three countries have readings that are still above their respective levels of February 2020.

I have not spoken of the virus. But it clearly has played a role in weakening the economy across Europe during this period. Since infections are starting to abate, maybe the trends will spring back as that stress is relieved. But there is nothing in the trend to strongly suggest that is in the works. German capital goods and overall real sales show expansion and strength. But they are oases of strength in a sea of either weakness or waffling. In the case of both capital goods and real sales, the three-month strength is so great that it must be ready to pull back to a pace that is more sustainable since growth rates do not grow to the sky. If that happens, IP will lose the source of its upward thrust. On the other hand, other lagging metrics do not show signs of playing out their weakness, rather they just seem to continue to waffle.

The outlook for the virus is one clear positive for Germany and for Europe as Omicron seems to be in a late endgame stage – at least for this cycle if not for good. But there is still the threat of a Russian invasion of Ukraine, an act, if committed, that could send a diaspora of refugees flooding through Europe and could strain the economies there. An invasion might also cause a shutdown of Europe’s, and especially Germany’s, gas supplies source from Russia and arrive though pipelines. The future conditions continue to look cloudy for these reasons. It is always good to try to ascertain the true trend. But, as Sir Isaac Newton pointed out, an object in motion tends to stay in motion until acted on by an outside force. And we have several candidates for that sort of outside force role pending as we await the future. Meantime, the current trends are not particular impressive on their own.