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Economy in Brief

Unexpected Dive for German Output
by Robert Brusca  August 6, 2021

Germany's industrial production fell by 1.3% in June after falling by 0.8% in May and falling by 0.3% in April. It's an ugly legacy and one that was not expected. German IP is now sequentially slowing. IP, while up 5.1% over 12 months, is falling at an 8.2% annual rate over six months and at a 9.4% pace over three months. This is the wrong direction. And it is a very different message from that spewed out by the Markit Surveys that are all sunshine and roses. This one is all fertilizer and thorns.

The slowdown is being forced on the headline index by weakness in capital goods where output declines by 1.3% over 12 months; the pace weakens to -18.3% over six months and again to -23.1% over three months. These decelerations are real and not simply technical. While the output of consumer goods ramps up to a 6.4% pace over 12 months then to 9.5% over six months to 15.2% over three months, that is not enough to dominate the slowing in capital goods. The intermediate goods sector is mixed with solid annual growth of 16.7% followed by a six-month pace of -0.4% (call it flat) then strengthening to +0.8% over three months (not much better than flat).

Construction output is waffling too. It is up by 0.8% in June following a string of losses. And it is declining at a 21% annual rate over three months. But construction output is up by 3.1% over 12 months then accelerates to a 10% pace over six months before diving over three months.

Manufacturing output also shows deceleration with declines in each of the most recent three months. But real manufacturing orders are still showing gains on all horizons. And yet real manufacturing orders also are decelerating from 12-months to six-months to three-months. Real sales are declining in each of the last three months and falling hard (-16.3% pace) over three months as part of an ongoing deceleration.

These are very unfavorable trends...

Output is following what is being dictated by real sales (not so surprisingly). As we saw in the order report, there has been substantial weakness in foreign orders which are the lifeblood of the German economy. German foreign orders are falling sequentially and decline over three months. It is German domestic orders that are strong, accelerating to a nearly 40% annual rate over three months. But that does not seem to be carrying IP forward.

Survey data
The survey data are kinder and more upbeat in their assessment of German industry, but then they are less relevant and really only useful to the extent that they are more topical. All surveys show output up on average over the last three-month average compared to their previous sequential three-month average. All of them improve month-to-month except IFO expectations. The ZEW current reading improved by quite a lot in July.

Other Europe
Elsewhere in Europe, fellow EMU members France, Italy, Spain, and Portugal that report IP early show three increases out of the four (Portugal is the exception). France and Italy show output increasing over three months while Spain and Portugal log declines; a large one for Portugal. There is sequential slowing in Portugal and Spain. There is a waffling slowing in Italy and France. On balance, the overall picture is surprisingly weak and here comes the virus…

Compared to February 2020
German overall output is weaker by 6.8%, compared to February 2020. Manufacturing output is lower by 7.7%. All sectors are lower with capital goods hit the hardest. However, construction is higher by 1.4% on that comparison and real manufacturing orders are higher by 11.2% but on fading momentum, as we saw above. All German indicators are higher compared to February 2020. Spain's output is higher than it was in February 2020 by 0.8%. Italy's is flat. French output is lower by 6.2%, and Portugal's is lower by 9.4%.

There is undeniable weakness in this collection of results. Meanwhile the EMU composite PMI was extremely strong in June and rose further in July. The manufacturing gauge was strong in June backing off somewhat in July while the service sector reading jumped in June and continued to climb in July.

To say that, there are mixed signals here is to make an understatement. But the traditional German data are uniformly weak and showing signs of wear and tear while the survey type data that rely on various diffusion indexes are what looks strong. Of course, diffusion is not a real-world gauge; this approach is a shortcut to data accumulation. Especially in times like these, diffusion is unreliable. Diffusion gauges only report on the proportion of indicators that are expanding or contracting and it does not deal with magnitudes at all or with non-reporters whose output would be missing from an IP report or orders survey making those surveys weaker. In a diffusion index if an observation is missing, it is simply not part of the analysis. During times of weakness, this creates bias.

We do have problems with the virus and things to worry about. Germany is showing signs of difficulties as are the other large economics in Europe. This is not where Europe is supposed to be. But the data are the data and there is no sugar-coating them unless you wish to embrace survey data over accounting style data.

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