A Confusing Picture of EMU Production Trends

The chart shows that European Monetary Union industrial production in manufacturing has been declining across sectors on a year-over-year basis for quite some time. Intermediate goods output declines extended back to April 2022; for consumer goods the declines occurred early in 2023 and have persisted; for capital goods the declines occurred around July 2023 and with one spike reversal the declines have come back vigorously. Capital goods output is currently showing the deepest year-on-year decline in output of any manufacturing sector. The annual trends are clear and quite negative. However, the short-term trends are different, much more optimistic.

Sequential growth rates in IP From 12-months to six-months to three-months, EMU output excluding construction shows a turnaround in progress. Output falls 7.1% over 12 months, falls at a 2.8% annual rate over six months, and falls at just a 2.4% annual rate over three months as trends make steady improvement. Sequentially from 12-month industrial production is showing signs of diminished declines. This trend holds for manufacturing as well where output declines at 7.5% over 12 months, while over three months and six months the pace of decline is reduced to under 1%. We see improvement in two of three sectors as well. Consumer goods output echoes this improvement with year-over-year decline in output at 6.3%, a six-month decline at a 4.2% annual rate, and a three-month decline at a 2.3% annual rate. Intermediate goods show output is gaining momentum culminating in an output increase over three months. Twelve-month intermediate goods output falls by 2.9%, then rises at a 0.4% pace over six months, and then increases at an annual rate of 6.3% over three months. The fly in the ointment for short-term trends in manufacturing is capital goods. Capital goods output declines at a 9.7% annual rate over 12 months; over six months it continues to decline at a rapid pace although slightly diminished, falling at a 9.1% annual decline rate, and then over three months, the rate of decline accelerates sharply to -17%. These trends create a confusing picture for output where there continues to be long-term weakness punctuated by short-term improvement in consumer and intermediate goods but held back by ongoing and severe weakness in capital goods output.

On a quarter-to-date basis (QTD), weakness dominates the overall statistics with a 6.8% annual rate decline in eurozone output excluding construction. Manufacturing is even more severely crimped with a decline at an 11.5% annual rate. The manufacturing result is driven by a 34.7% annual rate decline in the output of capital goods even though intermediate goods output increases at a 7.3% annual rate and consumer goods output falls at only a 0.5% annual rate. In the quarter-to-date, manufacturing trends are weak but also are represented by considerable variety.

Country patterns in manufacturing Across 13 of the earliest members of the European Monetary Union in February, we see manufacturing declines in only three: Belgium, Spain, and Greece. In January, eight countries show declines in output. In December, only four showed declines; those included Germany, Finland, Spain, and Portugal. Quarterly trends across countries show some signs of progress. Ten countries showed declines in industrial production over 12 months; that count was reduced to nine countries over six months and reduced further to five countries over three months. The median result across these countries is for a decline in output of 2.4% over 12 months, a decline of 2% output at an annual rate over six months and an increase in output at a 1.6% annual rate over three months. The country level data support a more optimistic reading of trends. Even so, the quarter-to-date comparisons eight of these thirteen countries with output declining in the first quarter.

The road ahead Manufacturing in the European Monetary Union continues to be spotty. Output in the largest economies also continues to be erratic. Inflation is starting to be contained, but results from the U.S. show that the drop of inflation that seemed so promising over the past year and a half has now slowed and may even be exhibiting increasing tendencies over shorter horizons. It's unclear if the trends in the U.S. have any import for what we should expect in the EMU. For the moment, there's some optimism about monetary policy and the prospect for the European Central Bank to cut rates in June.

The environment However, there's also ongoing concerns about geopolitical risks and the failure of the U.S. to continue to provide substantial and military support to Ukraine amid its own political divisions. Iran just executed a significant attack on Israel launched from its own territory the first attack of its type in recent years. Although the missile attack was thwarted, it sends a chilling message across the Middle East and it's unclear what its impact will be on the other ongoing internal battle between the Israelis and Hamas, particularly in Gaza. The global situation continues to churn with a lot of geopolitical uncertainty and with a large dose of economic uncertainty. In the United States, elections are queued up for November, a half-year away. Political divisions within the United States run at epic proportions. The stakes will certainly be high this November with both parties launching campaigns that could be characterized as ‘no holds barred.’ This is not the best environment in which to try to handicap what's going to happen with monetary policy; however, that continues to be an issue in the United States as well as globally. Clearly the best solution is to take it a day at a time.