EMU IP Takes a Small Step Backward

In the wake of European Central Bank rate cuts, the European Monetary Union reports a 0.3% reduction in industrial production in July. Industrial production in the euro area shows a decline of 2.2% in output over 12 months; the rate of decline improves slightly to -1.6% when annualized over six months but then has a severe setback over three months as it falls at a 4.8% annual rate. You simply cannot put positive spin on this month’s report or on the trend. The best we can is that year-on-year trends are not worsening; several are potentially encouraging if they persevere.

The patterns in manufacturing are the same but manufacturing output declines at an 8.2% annual rate over three months, a much larger decline than for output overall. Sectors show some upbeat trends for consumer goods, as output is up by 1.6% over 12 months and then continues to advance at a 4.3% annual rate over six months and over 12 months. The increase in overall consumer goods output is underpinned by a steady acceleration in nondurable goods output and held back by declines in durable goods output over 12 months, six months and three months. Intermediate goods output faces a decelerating profile, with output falling 3% over 12 months, falling at a 3.7% annual rate over six months, and falling at a 6% annual rate over three months. The capital goods progression is not as steadily deteriorating, but it's a chilling development since output falls by 5.1% over 12 months, then that decline is trimmed to -2.9% at an annual rate over 6six months, but it comes back to show a 12.6% decline at an annual rate over three months. That's not a clean steady deterioration but the 12.6% pace of decline over three months is certainly chilling.

In the quarter-to-date, which is at this point a nascent calculation, one-month into the new quarter. Overall output falls at a 3.9% annual rate, manufacturing output falls at a 5.3% annual rate, consumer goods output is rising strongly pushed ahead by nondurable goods output. But apart from that, there are ongoing sharp declines in consumer durables output, the output of intermediate goods, and then the output of capital goods.

The performance of industrial output in July supports the decision by the ECB to cut rates even though that decision occurs with inflation over the top of its target and still accelerating. However, the factory sector has been weak for quite some time and the services sector has been strong enough to provide overall expansion for the economy. The goods sector is simply the weakest part of the economy and so it's going to seem like it is in support of any policy step taken to offset weakness.

EMU member countries The country level data for 13 of the earliest European Monetary Union members shows output declines in July in six of these reporters. In June, there were output declines in five of them; in May, there were output declines in seven of them.

Sequential calculations show that output has been increasing less broadly from 12-months to 6-months to 3-months. Over 12 months about two-thirds of the reporting countries showed output increases/ Over six months that fell back to 50% of them, whereas over three months only a little better than one-third of the reporting monetary union members are indicating accelerating output. In addition to that, over the last three months eight countries show actual declines in output in progress.

The manufacturing sector remains the weakest sector in the global economy with service sectors continuing to churn out growth. That means that economies can continue to report job growth since the service sector globally is the job creating sector. However, for growth to become more vital, the goods sector is going to have to join in. For now, manufacturing continues to be challenged.

Globally unemployment rates are still quite low even though in many places unemployment rates are up from their lowest levels. Central banks in most places have embarked on easing cycles with the Bank of Japan of course being the odd man out of this process. The Baltic dry goods index shows that there has been some recovery in international trade; however, across recent months, that trend has gone stagnant. In the meantime, pastor geopolitical conditions continue to deteriorate in the Middle East and for the Russia-Ukraine war. The risks may even be getting worse.