EMU IP Snakes Ahead in May, But Rides a Downtrend

Industrial output in the European Monetary Union in May rose by 0.2%. This is the headline series excluding construction. The gain follows a rise in output of 1% in April and a much sharper fall of 4.4% in March. The incidental growth rate for output in May occurs amid a challenging period for output, a profile that is declining and unraveling at an increasingly rapid pace. Output falls by 2.1% over 12 months; over 6 months it falls at a 4.7% annual rate and over 3 months it falls at a 12.5% annual rate. The trends for output in the EMU are weak.

Quarter-to-date The quarter-to-date result for the headline shows output is falling at a 9.1% annual rate. Manufacturing output falls on the same deteriorating pattern as the headline with progressively deteriorating results. Manufacturing shows output falling at a 13.8% annual rate, two months into the second quarter. Manufacturing is quite weak.

Sectors Turning to sector results, consumer goods, intermediate goods, and capital goods log month-to-month increases in output across the board in May. In April, consumer goods output declines by 2.6% month-to-month, intermediate goods output falls by 0.9%, while capital goods output surges by 14.7% month-to-month. However, in March consumer goods output declined, intermediate goods output declined, and capital goods output plunged by 14.9%. Therefore, the sharp gain for capital goods in April was simply a bounce back from an even sharper loss in March. On balance, the sectors largely show the same deterioration as the headline in manufacturing.

Sectors sequentially Viewing the sectors sequentially, consumer goods output falls 3% over 12 months, falls at a 9.4% annual rate over 6 months and then falls at an 11% annual rate over 3 months. The consumer sector follows the pattern of across-the-board declines and generates a progressive series of decline that has output falls accelerating. Capital goods offer their own twist with a gain of 1.3% over 12 months; that gain diminishes to a rise at a 0.2% annual rate over 6 months and then gives way to a decline of 5.3% at an annual rate over 3 months. Intermediate goods follow with the only exception to the ever-deteriorating trend displayed by the headline, by manufacturing, and by other sectors. However, it's a modest deviation; as intermediate goods output falls on all horizons, it falls at a 5.4% annual rate over 12 months that's reduced to a 4.7% pace of decline over 6 months and then it returns to a 5.4% annual rate decline over 3 months. None of that makes the intermediate good sector look any healthier than the rest of output.

Quarter-to-date by sector On a quarter-to-date (QTD) basis, consumer goods output is falling at a 7.3% annual rate, intermediate goods output is falling at a 2% annual rate, and capital goods output is falling at an 18.7% annual rate. Within consumer goods, consumer nondurables are showing a decline in the QTD at a 9.7% annual rate. That contrasts to an increase in durable goods output that's expanding at a 2.3% annual rate, about midway through the second quarter.

By country... Output trends across EMU members in May show us declines in output in five of the 13 members shown in the table. The largest economies are still reporting gains in May with Germany posting a 0.2% rise in output, France a 1.4% rise, Italy a 1.4% rise, and in Spain a sizable, 8.1% annual rate increase. However, monthly data are ragged and irregular. In April, nine of 13 member countries in the table logged output declines. In March, eight of the 13 countries logged output declines.

Countries sequentially Sequentially EMU countries show output declines over 3 months in 10 of 13 countries. Over six months 7 countries show output declines; over 12 months the same seven countries show output declines. In fact, there are seven countries that report output declines on all three horizons, those are: Austria, Belgium, Italy, the Netherlands, Luxembourg, Ireland, and Portugal. Among those countries, the sequential declines are getting progressively worse in Austria, Belgium, the Netherlands, Ireland, and Portugal.

Isolated strength Only Finland, France and Spain show output increases on all three horizons. Finland shows progressive strength with growth moving up from 0.7% over 12 months to a pace of 3.6% over 6 months to a pace of 9.8% over 3 months. Spain also shows progressive acceleration with output moving from 1.1% over 12 months to 11.4% annualized over 6 months to a pace of 21.8% over 3 months.

Nonmonetary union Europe Clearly weakness in the monetary union dominates strength; it would be surprising to see the strength in these few economies hold up given the weakness and that abounds in the euro area around them. However, at the bottom of the table, we see that there is more strength for nonmonetary union members. Sweden and Norway both show output increases over all three timelines, but persisting growth is not building momentum. The U.K. shows output increases over three months and six months after it logs a 1.2% decline over 12 months.

QTD by country In the quarter-to-date, output is falling in all the members (in the table) except for France and Greece. Finland that has a string of output increases blogs are minus 1% contraction in the quarter-to-date.

Since Covid...lingering weakness The data chronicling the change in output since COVID struck underline the weakness that has dogged the European Monetary Union over that period. Six of the 13 reporting countries in the table have output lower in May 2023 than it was in January 2020 – a period of over three years! These countries include Germany, France, Italy, Luxembourg, Malta, and Portugal. The list is populated by some of the very largest monetary union economies as well as some of the some of the smallest ones.

Summing up Despite the increase in output on the month, the report on industrial production for the monetary union is disappointing. The trends indicate gloom and are disappointing. And inflation continues to ride over the top of the ECB's target meaning that monetary policy is going to remain restrictive despite this sour trend for industrial output. As we've seen in previous reports - so far - the labor market in Europe, as in the U.S., has remained resilient and the unemployment rate is still clinging to what are low rates of unemployment for the monetary union as well as across nearly all the member countries. However, with this weakness in industrial output, and with the ECB set to raise interest rates further, the outlook for growth in the monetary union is being challenged.