Economy in Brief: November 2022

German industrial output rose by 0.6% in September, led by a 1.4% gain in consumer goods output and a 1.1% rise in capital goods output as intermediate goods output slipped by 0.1% month-to-month. Conditions in manufacturing remain 'in flux.'

The trends for overall German industrial output are mixed with output up at a 2.5% annual rate over 12 months, rising to a 3.1% pace over six months then falling to a decline at a 2.4% annual rate over three months.

Trends for output remain mixed— but there is a lot of weakness mixed in The two sectors, consumer goods and capital goods, do not clarify trends, as consumer goods output rises by 0.5% over 12 months, falls at a 4% pace over six months and rises at a 3.6% rate over three months. Capital goods output rises at 11.8% annual rate over 12 months and at a 21.7% annual rate over six months then slips to grow at a 6.7% pace over three months. But capital goods output is increasing over each of the three horizons.

By comparison, intermediate goods output does show a clear trend and the trend is for deceleration and shrinkage. Intermediate goods output falls by 2.3% over 12 months, falls at a 3.9% annual rate over six months and then falls at 11.7% annual rate over three months.

The output of the construction sector in Germany shows a 0.8% rise in September after two months of drops. The sector shows declines with a -0.7% rate over 12 months, a step back pace of -9.7% over six months and then a less aggressive fall but still a substantial fall at a -7.8% annual rate over three months. Clearly the construction sector isn't doing well although it does not have a clear sequential trend. The absence of sequential deterioration is different from the absence of ongoing. Deterioration — there is ongoing deterioration; it's just not persistently worsening.

Manufacturing showed an increase in output of 0.8% in September after two months of declines. Manufacturing output is up by 4.2% over 12 months; that accelerates to a 6.7% rise over six months then deteriorates to a 1.2% annual rate of decline over three months. The path for manufacturing, like its components, remains unclear.

Real orders are real weak Real manufacturing orders, however, do trace out a clear path and it's not encouraging. Orders fall at a 10.7% annual rate over 12 months, fall at a 12.7% annual rate over six months and then the decline accelerates to 17.6% over three months. Real orders also have contracted for two straight months.

Sales are a mixed bag but more positive Real sales rose by 0.2% in September after rising by 1.2% in August. Still, sales trends remain murky with a 7.4% increase over 12 months, a 12.3% gain over six months and a decline at a -2.3% annual rate over three months.

Indicators are weak... period Other indicators about industrial performance in Germany paint a clear picture of deteriorating trends. All four indicators, the ZEW current reading, the IFO manufacturing index, the IFO manufacturing expectations index, and the EU Commission industrial index show German deterioration on averaged metrics over 12 months to six months to three months. On monthly data, the two IFO measures show a minor increase month-to-month in August compared to July before falling to levels in September even below their, respective, July levels by clear margins.

**All the German metrics in the table are weaker than their January 2020 levels before Covid struck except for the EU Commission reading - that one is higher. ** Quarter-to-date data: the completed third quarter Quarter-to-date data (which are now for the completed third quarter) show mixed readings with clear consistent reading of weakness from the indicators. Real orders are weaker in the QTD period. Overall output and manufacturing output are stronger along with real sales. For industrial output by sector, there are declines in consumer and intermediate goods offset by a strong increase in capital goods output. There is sharp weakness in construction in the quarter.

The PPI inflation backed off its obvious blow-out gain of 5.1% in August to score an increase of 1.3% in September – still sizeable. The headline PPI (PPI excluding construction) is up by 42% over 12 months, up at a 33% annualized pace over six months and up at pace of 48% annualized over three months. Only Italy, Austria, Luxembourg, and Belgium have a lower year-on-year inflation rate in September than in August.

Goods news... Capital goods and consumer goods prices post strong annualized gains over 12 months, six months, and three months, with both sectors showing a small let up over three months. It's not enough of a step-down to call it a real change in trend. But for intermediate goods the 12-month gain of 19% dwindles to an annual rate of 13% over six months, then plunges to an annual rate gain of 1.1% over three months. That's good news.

Manufacturing goods prices also show a step down from 17% to 10% to -1.4% at annual rates from 12-months to six-months to three-months -more good news there.

Bad news... But core EMU prices (prices excluding tobacco, alcohol, food, and energy) show steady annual rate acceleration from 5.7%, over 12 months to 6.7% over six months, to 7.9% over three months. And that is not good news - in the face of the other trends - it's particularly bad news.

Lower energy prices are no panacea That's a complication. Clearly energy prices have broken lower. Brent oil prices are up by 20% over 12 months but falling at an annual rate of -36% over six months and by -65.5% over three months. This is a major factor behind the de-escalation of intermediate goods inflation, but that has not spread so much to other sectors yet and as of yet, not a factor in the core at all.