German IP Shows Some Push

German industrial production had revived in the last two months, rising by 2.1% month-to-month in February after rising by 1.3% in January. December production had fallen by 2% month-to-month. The upshot is that the 12-month growth rate for production is still showing a decline of 4.8%; over six months, the change in production shows a gain of 0.4% at an annual rate, while over three months, it moves up to 5.6% at an annual rate - quite a strong pace. Overall production in the quarter-to-date is rising at a 5% annual rate. Taking a much more distant benchmark, we compare the level of output today to what it was in January 2020 before COVID struck and find it's still lower by 8%. This is very definitely a short-term revival as the longer-term trends are still weak. The chart explores the year-over-year growth rates by sector for German output.

Output by sector Output by sector shows gains in each sector in February and gains in two of three sectors in January, the exception being capital goods where a 1.5% gain in February is compared to a 1.5% drop in January. All three sectors, consumer goods, capital goods, and intermediate goods show declines in December. The sequential growth rates that compare the annual rate of growth over 12 months to six months to three months find consumer goods output ramping up at an extremely strong pace from -1.8% over 12 months to a 21% annual rate over three months. Capital goods output shows some improvement, but it then runs out of gas; capital goods output is down at a 7.6% annual rate over 12 months; that's reduced to 4.5% annual rate drop over six months but then worsens ever-so-slightly to a 4.9% drop over three months. Intermediate goods get back on-theme with sequential acceleration in output, progressing from a -4.6% growth rate over 12 months, to a +6.5% annual rate over three months.

Orders, sales, PMI Manufacturing output, orders, and real sales showed increases in February, but both sales and orders declined sharply in January, after having increased in December. Manufacturing output is up for two months in a row. Germany's manufacturing PMI rose in January, but it sank back in February. Manufacturing output is accelerating. Real manufacturing orders are also showing a steady progress higher, although all of their growth rates are still negative. Meanwhile, real sales show contractions over three months, six months and 12 months; the three-month and six-month contractions are larger than the 12-month contraction. The bottom line is that manufacturing output falls into line showing sequential gains, but orders show declines amid sequential improvement, and the real sales lag behind those other gauges.

Other surveys of Manufacturing and Industry Other manufacturing surveys tell a mixed tale of the last three months. The ZEW survey shows conditions worsening from December, in January and February. The IFO manufacturing gauge shows slight improvements on that timeline; IFO manufacturing expectations also show a slight step up. However, the EU Commission's industry survey shows a progression of deeper weakness. Viewed sequentially, the ZEW survey shows steady erosion from 12-months to six-months with most of that 12- to 6-month deterioration still in-place over three months. The IFO manufacturing gauge weakens sequentially as does the IFO manufacturing expectations reading. The EU Commission index weakens progressively from 12-months to six-months to three-months.

IP in other Europe Industrial gauges elsewhere in Europe are up to date for Portugal, Spain, France, and Norway. Each of them shows an increase in February compared to January. However, each of those countries also shows a decrease month-to-month in January compared to December. And in December, half of the countries show declines and half of them show increases month-to-month. The experience across Europe obviously has been uneven. Sequential growth rates for industrial production also are uneven. Portugal has an uneven pattern. Spain shows acceleration along with Norway. There is a deteriorating pattern for France. Once again it's a mixed bag of results so we're unable to characterize Europe as doing anything as a whole. European economies still seem to be responding according to their individual circumstances. In the table, of course, Germany, Portugal, Spain, and France are all European Monetary Union members while Norway is not- but even among the monetary union members, we're not seeing the same patterns.

Q-T-D Quarter-to-date (QTD), Germany shows strong results with overall production rising 5% at an annual rate and only capital goods showing a decline on a Q-T-D basis. Portugal shows a Q-T-D gain in output of 7.4% annualized. Spain logs 13.7% with Norway showing a 1.5% gain. France shows a decline in industrial production on Q-T-D basis with a -3% annual rate reported.

The Post-Covid wrap-up Post-COVID has been a difficult time for Germany and for Europe. Industrial production in Germany is lower by 8% compared to January 2020 and all the sectors are lower. Manufacturing output in Germany is lower; real manufacturing orders and real sales are lower as well. The indicators from ZEW, the two from the IFO and the EU Commission survey all are lower compared to the January 2020 values. Industrial production across Europe is weaker compared to January 2020 except for Spain showing industrial production stronger by 2.3%. Norway is weaker by only 0.8%, fairly close to unchanged on that timeline.

The wrap-up for February The German numbers for the last two months are impressive and strong. The strength is relatively widespread; however, the gains do not transcend orders and real sales. If we're looking for corroboration or underpinning for the strength in output, the other industrial surveys do not strongly back the rebound that we're seeing in industrial production in these last two months. The sequential patterns that dig back a little bit farther also are mixed. As we can see on the chart at the top, the year-over-year percent changes across German sectors are still week. As such, it seems to be a good idea to be somewhat modest in our expectations for German industry despite perhaps some pent up demand to call this a ‘strong report’ and to try to extrapolate it ahead. Certainly, the performance of real manufacturing orders and sales suggest that that's not a good idea. There are some good things stirring in the German economy over the last two months, but we're going to have to wait and see how much of this is real and sustainable and whether industry is going to pull the other metrics into a stronger orbit. Also there is a question as to whether the rest of Europe is going to be part of any revival or not.