German IP Sequentially Weakens

German industrial production rose for the second month in a row in May. The headline for IP increased by 0.2% following an April rise of 1.3%. However, those two increases followed a substantial drop of 4.2% in March. As a result, the three-month annual rate decline in German industrial production is at a -10.3% annualized rate, the decline over six months is at a -1.6% pace and the decline over 12 months is -1.4%. German industrial production is declining; its decline is accelerating despite increases in output over the last two months

Monthly sector patterns
In May, consumer goods output fell by 0.9%, dropping for the third month in a row. Capital goods output rose by 2.2%, rising for the second month in a row, after a 3.7% increase in April. While that two-month string of increases seems impressive, it still does not get industrial production out of the hole since capital goods output in March fell by 7.8%. For intermediate goods, the output trend has been hot and cold: intermediate goods output fell by 0.4% in May, rose by 0.7% in April and fell by 3.3% in March

Sequential trends in IP by sector
Looking at these three industrial production sectors, what we see is clear deceleration. For consumer goods, output rises by 2% over 12 months, eases to a 0.4% rate of increase over six months and then falls at an 8.5% annual rate over three months. Capital goods also show clear sequential deceleration with a 0.2% decline over 12 months, a drop at a 3.5% annual rate over six months that accelerates to a decline at an 8.9% pace over three months. Intermediate goods do not show sequential deceleration per se; however, they do show declines over all three sequential periods. They log a 4.1% decline over 12 months, a smaller decline over six months, then register an 11.4% rate of decline over three months. While the six-month decline is not as severe as the 12-month decline, the weakness steps up over three months. In fact, over three months, intermediate goods output is weaker than any of the other sectors that are showing sequential declines.

Manufacturing output orders and sales
Manufacturing output, taken by itself, shows that output increased by 0.5% in May after a 1.9% rise in April. Those increases compare to a 4.8% drop in March. Manufacturing output in Germany shows sequential deterioration from a -1.3% annual rate over 12 months to a -1.9% pace of decline over six months to a -9.8% annual rate over three months. Real manufacturing orders also show persistent and sequential decelerations with orders falling by 3% over 12 months, following a 5.2% annual rate drop over six months, and then falling at a 21.1% rate over three months. Sector sales in manufacturing adjusted for inflation rise by 1% over 12 months, fall at a 1.2% pace over six months and fall at an accelerated 5.5% decline over three months. Sector sales adjusted for inflation also are showing this persistent deceleration. Reports on German output and on manufacturing are consistently weak and all the sectors and all these metrics show declines in the quarter-to-date as well.

Other German indicators
We can also look at some industrial indicators for Germany: there's the ZEW current index, the IFO manufacturing index, the IFO manufacturing expectations index, and the EU Commission industrial index. Some of these are net diffusion indexes and some of these are just raw indexes so that the raw index level month-by-month isn't necessarily meaningful when compared across indicators. But if we look at the average levels for all these variables and how they change, we see secular deterioration: all four of these industrial gauges (1) the German current situation, (2) the manufacturing situation, (3) manufacturing expectations, and (4) the EU industrial index – all get weaker from 12-months to six-months to three-months.

Indicators quarter-to-date
In the quarter-to-date, the ZEW current index weakens by 4.1 points and EU Commission index weakens by 0.2 points. However, the IFO manufacturing index increases by 0.7 points and the IFO manufacturing expectations reading improves by 1.6 points in the current quarter-to-date.

IP elsewhere in Europe
Other early-reporting European countries, three of them European Monetary Union members, report manufacturing IP for May. None of them show the sequential deterioration that we see in Germany. France shows a 2.2% gain its index over 12 months that accelerates to a 2.9% annualized pace over six months but then collapses to a 0.3% decline over three months Spain shows persistent acceleration. Sweden, an EU member, shows persistent acceleration. Portugal shows a 3.1% gain over 12 months, a decline in output over six months, then a stronger 9.7% annualized gain over three months.

Quarter-to-date trends
The German economy, the largest in Europe, is showing some of the weakest and consistently weakest results in May in the quarter-to-date. Other early-reporting European economies show mixed trends. France shows a decline in the quarter-to-date with industrial production falling at a 3% annual rate. However, Spain, Portugal, and Sweden all show increases in industrial production in the quarter-to-date as of May.

IP growth since Covid struck
Germany also shows declines in industrial production for its headline, for manufacturing overall, for construction, and for the three main manufacturing sectors compared to where these indexes stood in January 2020, just before COVID struck. However, among other European reporters, trends are more diverse. Industrial production in France is weaker than it was in January 2020. Portugal is weaker than it was in January 2020 as well. But both Spain and Sweden show industrial production stronger than the indexes were over two years ago.

Wrap-up
Germany's economy is getting hit hard by the current business cycle, particularly because it had done a lot of business with Russia and because it depends on Russian energy sources. The economy is busy trying to reorient itself and trying to deal with the Russian sanctions and the ongoing war between Ukraine and Russia. Germany does show some hints of better activity over the last two months with output by sector sputtering although this sputtering behavior comes on the heels of an extremely weak set of readings from March. At this point, the March reading is dominating even those sectors that show some modest rebounding in April and May. Other indicators confirm that the German economy is laboring under tough times and with the ECB preparing to raise interest rates we should not be too ambitious in our expectations for the German economy. We should also recognize that the sharp deterioration in the German measures in March trace back to the start of the Russian invasion against Ukraine which began in late-February.