German Manufacturing Output Falls in July; Unwelcome News Comes Early?

German industrial output fell by 0.3% in July after gaining 0.8% in June and falling by 0.1% in May. These figures, of course, do not reflect the freshest news in Europe concerning the shutting of the gas pipeline from Russia. Germany is beginning to take some steps as it has agreed to keep open two of three nuclear power plants that had been scheduled to be mothballed. Still, it's keeping open only two of three not three of three and it appears that Germany is still not willing to pull out all the stops to find alternatives to the gas that they're losing from Russia even though more nuclear power would mean that Germany could burn less gas to generate electricity and make up for some of the loss from the Russian pipeline. Green still has power in Germany. When winter comes, the new motto could be ‘let them burn furniture.’ That happened a year ago in the U.S. when Texas had a pronounced and severe cold snap and the electric grid failed. Reality lurks and action shirks. Germany needs to think right now about what winter is going to be like if the pipeline stays shut- it needs to act now.

Monthly results Energy is going to be a concern for the future; what's unfortunate is that as of July Germany logs a decline in industrial output, led by a 2.4% decline in consumer goods output, a 0.8% decline in capital goods output, and a 0.6% decline in intermediate goods output. All this is ahead of any energy shortage. Construction sector output also fell by 1.3% in July. Manufacturing output fell by 1.0% in July. What’s next when energy is in short supply?

German output trends German output trends are not quite as bleak, but they're not very encouraging either. Growth rates from 12-months to six-months to three-months show industrial output falls by 1.1% over 12 months, it falls at a 4.2% annual rate over six months, then it gains at a 1.6% pace over three months. Three-month output declines for consumer goods and intermediate goods, but those declines are dominated by a sharp rebound in capital goods output. Manufacturing output declines 1.4% over 12 months and drops at a 4.2% pace over six months; however, it expands at a 3.4% annual rate of increase over three months.

German orders point to weakness Manufacturing orders, which are highly correlated with manufacturing output, show a 13.7% decline in real orders over 12 months, at 17.8% annual rate decline over six months and a slower, 6.2% annual rate decline over three months. The pace of decline does diminish over three months, but it's still a significant pace of decline. Meanwhile, the monthly data show increasingly large declines in orders from May to June to July.

Sales trends Real sales in manufacturing show a convoluted pattern with a 1.1% gain over 12 months, a 4.1% annual rate drop over six months, and a sharp 17.3% rate of increase over three months. The three-month increase is based on a 2.5% increase in May, a 3.4% increase in June, but then tempered by a 1.8% drop in July.

Industrial indicators German industrial indicators are not encouraging. The ZEW current index weakens from 12-months to six-months, to three-months. The IFO manufacturing index, the IFO manufacturing expectations index, and the EU Commission industrial index all follow suit. The monthly patterns are equivocal, but they generally show declining activity month-to-month from May to June to July.

Other Europe Other European countries have issued early industrial output reports: they show mix patterns. Portugal shows declines in each of the last three months compared to Sweden where there are increases and accelerating increases across the last three months. Norway shows accelerating activity over each of the most recent three months as output moves from a 2.2% decline in May, to a 0.2% increase in June, to a 1.4% rise in July. However, the sequential performance of these countries across broader spans is mixed and less encouraging. From 12-months to six-months to three-months, Norway shows sequential deterioration. Sweden shows sequential acceleration- and some real strength. Portugal shows a mixed pattern ending in weakness over three months. Only Sweden shows an increase in output over three months, while Portugal and Norway report declines in output over three months.

QTD: Quarter-to-Date July marks the start of data in a new quarter; the early read shows an increase in output at 1.2% annual rate in the third quarter over the second quarter base for Germany. Sweden and Norway show significant increases over their second quarter output bases while Portugal shows a sharp decline. German indicators, early in the third quarter, also report declines compared to their second quarter values. The German construction sector shows a decline QTD as well. All manufacturing orders show a decline QTD; manufacturing output rises at a skinny 0.2% annual rate. Real sales in manufacturing are up at a robust 7.5% annual rate- a marked contrast.

Summing up The bottom line is that economic data are mixed but also imbued with weakness and a lot of recent weakness in an environment where inflation is too high and where the ECB will seemingly be forced to raise interest rates even though an important energy source, Europe’s most important gas source, has been cut off… and could remain off. Growth in Europe is going to be challenged by this outcome and, of course, the ECB is going to be challenged to make policy with the threat of economic weakness juxtaposed to the reality of excessive inflation. German industry is already showing that it is starting to trend lower: all manufacturing orders are weak and real sales have been uneven. The German surveys are less equivocal showing broad and consistent weakness. Based on this snapshot the outlook is not very encouraging.