German IP Drops...and Leads Europe Lower?

German industrial production fell 3.9% in March. There were declines in all three manufacturing sectors: consumer goods output fell by 1.5%, capital goods fell by a large 6.6%, while intermediate goods output fell by 3.8%. Construction output bucked the trend, rising by 0.9% in March.

These declines followed February where two of three manufacturing sectors advanced and January where all three manufacturing sectors advanced. Construction output has increased in each of the last three months: January, February and March.

Sequential growth rates raise more questions than they determine reliable trends. Consumer goods output is an exception to this with output rising at a 5.2% pace over 12 months, accelerating to a 10.6% pace over six months, and accelerating further to a 19.9% annual rate over three months. Intermediate goods decline on each of these same horizons, but the declines are not clear decelerations. Intermediate good output has a 3.5% decline over 12 months; that's reduced to a 1.2% pace of contraction over six months and then there is a clear step-up in the pace of decline to an annualized 10.5% pace over three months. Similarly, capital goods output trends generally show deterioration and deteriorating patterns but have a break in the wrong direction over six months. Capital goods output falls by 8.2% over 12 months and then posts a small 0.5% rate of increase over six months and goes on to log a large 29% annual rate of decline over three months.

Each of the manufacturing sectors seems to have its own trend or trajectory underway; however, these do not combine for any sense of a clear picture for manufacturing overall. Construction on the other hand shows acceleration as output falls by 0.6% over 12 months, rises at a 10.7% pace over six months then accelerates to a 30.2% annual rate over three months. Still, we are not left with a clear picture of where German production is headed.

Other horizons In the quarter-to-date (now the completed first quarter), German output shows increases in all sectors except capital goods where there's a 5.4% annual rate of decline. Consumer goods output spurts at a 19.1% annual rate and intermediate goods output increases at a 2.7% annual rate; in construction output rises at 18.5% annual rate.

Looking at these sectors since January 2020 when the virus struck, total output, capital goods output, and intermediate good output are all lower than they were in January 2020. However, consumer goods output is 3.7% higher and the output of construction it's up by 1.8% on that two-year plus timeline.

Orders and sales In March manufacturing output fell by 4.6%, real manufacturing orders fell by 4.7%, and real sales in manufacturing fell by 5.9%. These weaknesses add to the weakness in industrial production overall and point to problems with orders and demand quite apart from output. Over three months real manufacturing orders are showing clear deceleration as they fall by 3% over 12 months, fall at a 7.5% rate over six months, and then accelerate that decline, falling 12.6% at an annual rate over three months. Real sector sales make a familiar detour to slightly stronger numbers over six months; otherwise they also trace a weakening pulse. Real sector sales for manufacturing fall by 6.2% over 12 months, rise at a 2.4% annual rate over six months and then decline at a sharp 23.7% annual rate over three months.

Germany, among European countries, has been very locked into the Russian economy not only for its energy but also for commerce and with the sanctions put in place and the war going on between Russia and Ukraine, it's not surprising that the German economy is doing poorly; its orders are falling quite sharply, and sales are weak or consistently pulling back.

Industrial indicators Industrial indicators from ZEW, the IFO manufacturing survey, IFO manufacturing expectations and from the EU Commission industrial indexes all show weaker conditions in March than in February across the board. Sequential readings typically show greater weakness over shorter periods; however, the EU Commission indexes are remarkable for their stability. There is little-change in the EU Commission indexes when we look at its average levels over three months, six months and 12 months; however, we know that in March there is in this one month a substantial deviation and drop from previous averages,

Other Europe Turning to the industrial situation in other Europe, we have three European Monetary Union (EMU) members in France, Spain, and Portugal reporting early and then we have EU member Sweden reporting as well. Among these countries in March, only France shows output declines. Spain, Portugal, and Sweden show increases in output. Looking at their sequential results, output in France is accelerating from 12 months to six months to three months. The same pattern holds for Spain. Portugal starts out with some acceleration but then conditions fall off over three months with output declining at a 0.8% annual rate. Sweden also starts off with accelerating trend; it fails to produce stronger growth over three months compared to six months although it does produce another positive growth number.

On balance, Germany shows considerable weakness. The only clear strength from Germany is from a consumer goods output. But with sectoral weakness around it, we'll have to wonder whether that can be sustained. Forward looking data on German orders are showing sequential weakness and output tends to eventually follow orders. Real sector sales also show a tendency toward weakness. The industrial indicators for Germany show clear weakness in March and sequential weakness as well with readings that point to more weakness with one minor exception from the EU Commission indexes.

In other Europe, conditions are somewhat better than in Germany. Growth emerges but March as a stand-alone is not particularly strong. With ongoing hurdles in Europe from tightening monetary policy, a still-extant virus and war between Ukraine and Russia still going hot, heavy, and dangerous, the prospects for growth to remain solid or to accelerate in the rest of Europe seems remote. But for now, other Europe is doing better than it seems to be doing in Germany.