Industrial Output Is Making Gains across EMU

Manufacturing in the European Monetary Union advanced by 0.4% in April based on the performance of the median performer among the eleven countries listed in the table. That was a step up from a 0.2% decline in March and compares to a 0.6% gain in February. We have in hand S&P PMI data for the European Monetary Union in April for comparison. Month-to-month, that PMI reading was lower, as March was lower than February, although February had seen a month-to-month gain. In February, March and April, the manufacturing PMIs for the euro area continued to be below 50, that indicates output is contracting in the lexicon of PMIs.

However, the industrial production index for manufacturing is a different kind of accounting for industrial performance. It doesn't have all the elements that a PMI report, which has production, balanced with prices, supplier delivery lags, employment, and more. The overall PMI is a blend of all those things. Industrial production is simply about output and unlike the PMI gauge which looks at the breadth of change across categories among a group of individual reporting companies, the industrial production figures tote up actual output and present the result as a magnitude of change. The PMI process and the industrial production process generally produce similar signals. The PMI approach has the advantage that it can bring us data that are more up to date since diffusion data are easy to report. The industrial production approach gives us a more precise idea of what's going on in terms of the magnitude of change in the sector. Formally the PMI gauge looks at the breadth of output increasing or declining; industrial production looks at the magnitude of the change in output.

Typically, we compare the PMI gauge to the year-over-year growth rate in IP; on that basis, there is a ‘disconnect’ this month since IP falls over 12 months and manufacturing PMI is below 50 in April.

However, it's also clear that there is some progress going on in manufacturing. The month-to-month changes in growth and acceleration show improvement. Growth acceleration occurs in 63% of the categories in April using industrial production; acceleration is 46% in March and occurs across 61.5% of EMU members in February. Over the last three months, output has tended to accelerate more than to decelerate. Sequential data show output falling over 12 months, rising at a 0.8% annual rate over six months – again, based on the median- and rising at a 4.9% annual rate over three months. That's an accelerating trend. Engaging acceleration by calculating the breadth of acceleration across members reported in the table, we have 70% accelerating over three months, 38.5% accelerating over six months, and 50% accelerating over 12 months. That's not a crystal-clear trend, but it's suggestive of a manufacturing sector that is regaining its footing.

Quarter-to-date data output looks at the growth across European Monetary Union members in April compared to their first quarter average. On that basis, there is a median increase of 3.6% at an annual rate in the works. Only four of the reporters in the table show quarter-to-date declines in progress among monetary union members.

Assessing the ratio of current industrial production to January 2020 before COVID struck, there are five of eleven members that are still below that pre COVID level, underscoring the sense in which this period of growth dating back to pre-COVID has been disappointing. We're looking at a four-year period. And we're comparing the level of industrial output over that span and finding that nearly half of the members have output that's lower than it was over four years ago; that's not reassuring. However, if we look at the shorter-term growth, the growth rank of year-over-year IP growth compared to what it's been on data back to 2007, the results show more promise. Portugal, Greece, and Spain each show growth rates that rank in the top ten-percent of what they posted over that period. France and Belgium show growth rates that rank above their respective, 50th percentiles in the 60th percentile range. This indicates that their growth rates are above their medians. However, for most of the monetary union members Austria, Germany, Finland, the Netherlands, Luxembourg, and Ireland, growth rankings are below the 50th percentile indicating growth below their medians during this span. And for most of these countries growth rate rankings are below their 25th percentile - that is, they lie in the lower quarter of all growth rates reported. This further emphasizes the weakness in growth. Although the union does show some pockets of strength and there seems to be some rebound in progress.

Industrial production data for April show a more upbeat set of ratings than we get from the PMI data on manufacturing; however, performance in the monetary union and the manufacturing sector continues to be uneven. There is a sense of progress based upon growth and acceleration trends. However, the two non-EU members in the table from northern Europe whose results appear on the table are consistently much weaker than the growth being reported by the monetary union members.

While the ECB has moved ahead with a rate cut, it does not look like there is a program of rate cuts that is being initiated. The inflation situation continues to be a key ingredient the European Central Bank will consider in making monetary decisions going forward. Global economic conditions remain tainted by geopolitical conflicts and war. There has been backtracking in terms of the openness of international trade. And in a recent vote there appears to be a new trend in Europe indicating less confidence and the leaders of the European Union and the path that they had chosen for policy and growth. Time will tell how much the changes in the European Union’s representation will affect its policy going forward. But the recent elections indicate a shift to the right toward more responsiveness to country needs and away from a policy imposed on countries from the center.