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Economy in Brief

European GDP Is Mostly Steady But Weakened by Industrial Output
by Robert Brusca  February 12, 2016

European GDP decelerated slightly over four quarters while annualized GDP also slipped quarter to quarter. But the industrial sector was holding things back in Q4. Industrial output fell by 0.3% (annualized) in Q4 and it dropped by 1% in the EMU in December alone. GDP decelerated quarter to quarter in two of the largest four economies while it was steady in the other two. There is a reasonably broad spread of weakness in European GDP growth.

But industrial production is showing the most pronounced weakness. And this is bad news for believers in the business cycle because this is the sector that goes down first in a downturn.

The table shows that there is sequential weakness in IP as it is falling over 12 months, falling even faster over six months and falling faster still over three months. EMU IP is falling in two of the last three months. Weakness is embedded in capital goods and mixed in both intermediate goods and consumer goods.

Consumer goods output on a broader horizon is steady to accelerating from 12 months to six months to three months. Consumer durables output clearly still is gaining momentum on those horizons while nondurable consumer goods output is more or less steady. Intermediate goods output gains momentum from 12 months to six months to three months. But capital goods output is declining at progressively much faster rates on these sequential horizons culminating in an 8.1% annual rate decline over three months.

Similarly in the quarter-to-date, we find declines in overall output in consumer goods output, mixed results as between consumer durables and nondurables, a gain in intermediate goods output, and a 3% annual rate drop in capital goods output.

In the chart, we see the sharp turnaround and weakness reported in December for Germany, France and Italy, the three largest EMU economies. Up until the last month or so, they had been posting positive growth results; that was a breath of fresh air. But the turn lower in December has been relatively unexpected and sharp and it looks now as though we are back to the old weak patterns.

Markets and the economy Of course, as we keep reminding readers, the stock market selloff has been an artifact of 2016 and it is still well under way as of just about mid-February. Much of our data are still largely for December. There is palpable weakness being spread from stocks to the economy as wealth is being destroyed. We continue to hear `analysts' say how the stock market is much weaker than the economy, but since we are in the middle of an economic weakening, we really don't know where it is going or if that statement is true. Such talk is premature. In percentage terms, stocks always fall much more than economies as any negative GDP number is considered `bad' while stocks have to fall by 20% before markets even call it a correction. So there is some asymmetry in the way stocks vs. economic performances are described.

Growth and the policy environment

As of Q4, only EMU members Greece and Finland are posting actual GDP declines; both of those countries show back-to-back quarterly declines and year-over-year declines in GDP as well. Both are relatively small EMU economies and not really bellwethers. However, industrial output is lower year-over-year in tiny Luxembourg and in Italy and only up by 0.1% year-on-year in Finland. I still would not - based on these figures - be very willing to write off market weakness as being excessive or out of step with the economy. We do have some very excessive policies in play at central banks that are not exactly working magic with growth. While central banks do not want to admit it, they are running out of places to go and things to do to get stimulus. I doubt that anyone really wants to step up the degree of negative interest rates and put banks under that kind of stress.

About markets growth, black holes and pricing

Markets now -as always- are not mostly about where we are but about where we are going. In that sense, markets are very worried and worried for what seems to be some very good reasons. Janet Yellen can try to talk a good game in the U.S., but in the end the data are the data. We all can see them. And there is no sense mischaracterizing them. Consumption remains weak. Consumer sentiment just stepped back. Inventory building is weak. And the two look-ahead sector surveys for manufacturing and nonmanufacturing show a contracting manufacturing sector and a nonmanufacturing sector that is weaker only 38% of the time. Despite the Fed's stiff upper lip, these are not very reassuring reports. Growth in Europe is not exactly steady and solid as we see above. The ECB has pulled out all the stops and is still pulling. Germany reported today steady-to-weaker growth, with stimulus because of spending on migrants offset by some weakness on its trade account. In Japan, the negative rate policy backfired and the yen has risen! Japan's stocks market has fallen into a black hole. As result, in Japan physics is meeting economics in a new blend of absurdity. In the wake of Japan's policy failure, markets seem to be reacting to the implementation and talk of never before tried policies. They see uncertainty. They see central bankers doing more and losing control. They see weakness globally and they anticipate more. More of it is exactly what seems to be in train. Are markets really so wrong?

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