Industrial Sector in EMU and Europe Is Mixed in July

Output in the European Monetary Union in July remains a mixed phenomenon. Among the thirteen early reporters of industrial production, six of them show output declines in July, after ten of them had declined in June and five of them declined in May. Over the last three months there has not been a majority of countries showing output declines across all three months but there certainly is a critical mass of countries showing declines and a good deal of unevenness in output in the European Monetary Union. Out of 39 months-to-month changes (13 countries over 3-months), 21 of them showed declines (53.8%). In July among the four largest economies (Germany, Italy, France, and Spain), three of them showed output declines; similarly, 3 of the largest economies posted declines in June; however, in May, all four of the largest monetary union economies logged increases in output.

Sequential patterns: 12-months to 6-months to 3-months Sequential patterns in output are mixed. But looking at the diffusion index for the European Monetary Union overall in manufacturing, the three-month reading is below the six-month reading and the six-month reading is below the 12-month reading. The overarching view from the manufacturing PMI statistics is that there is ongoing weakness in the monetary union. Austria, Germany, Finland, Ireland, and Sweden (the latter not a monetary union member) each show declines in output over three months, six months and 12 months. The median for the monetary union overall shows a 2.1% decline over 12 months; output declines at a sharper 3.6% pace annualized over six months; that decline trims to a decline at a 1.3% annual rate over three months. The lesser decline in output over three months has a lot to do with a sharp 10.7% increase in output from Portugal, a 6.7% increase over three months in Spain, a 5.1% increase in the Netherlands, a 4.8% increase in Italy, and a 3.6% annual rate increase in France. Over three months there clearly is a collection of countries showing considerable strength. However, over three months Germany also shows a 9.5% annual rate decline, Austria logs a 7.9% annual rate decline, and some of the smaller countries post substantial negative numbers for output as well. Sweden, not a European Monetary Union member, logs a decline in output at a 12.6% annual rate over three months. Clearly, the monetary union and Europe are looking at relatively mixed conditions.

Accelerating output trends are weak but improving We also calculate in the table the tendencies for output to accelerate in the euro area on a month-to-month basis; 53.8% of countries show accelerating output in July compared to June. However, in June only 7.7% accelerated relative to May. In May 61.5% of the respondents showed output accelerated relative to April. Over three months 45.5% of the countries are showing output accelerated relative to six-months; over six months only 38.5% are accelerating relative to 12-months and over 12 months only 27.3% are accelerating compared to one year ago. The sequential growth rates on acceleration show that acceleration is a phenomenon that occurs in fewer than 50% of the respondents over each horizon (from 3- to 6-months and from 6- to 12-months). However, the proportion of firms experiencing acceleration has been steadily increasing; over three months at 45.5% the proportion is getting much closer to the neutral mark at 50%.

Quarter-to-date With July data, we have the first monthly observation in the third quarter. Quarter-to-date calculations look at the growth in July compounded over the second quarter average. The median for output in the second quarter in the monetary union is a decline of 3.2%; eight EMU member countries show negative numbers for output in the incipient third quarter with one-month’s data in hand.

IP growth rate rankings Ranking the year-over-year growth rates for industrial production on data back to mid-2006, only two countries in the table have a rank standing above their historic median growth rate over this span. France has a 77-percentile standing, and Malta has a 55-percentile standing. However, among the other large EMU member countries, Germany has a 25.4 percentile standing, Italy has a 32.7 percentile standing, and Spain comes close to having a median standing at the 49.8% mark. The median standing across all EMU members is much weaker at 23.4%.

Summing up Looked at more broadly, we compare output in July 2023 to the prevailing level in January 2020 before COVID struck. Seven European Monetary Union members still have output lower in July 2023 than it was in January 2020 before COVID struck. The diffusion index for the European monetary union evaluated on the same timeline is lower by about 27%. We can see that since COVID struck output has been greatly crippled in the monetary union. This, of course, has compounded features involving the impact of COVID, governmental responses, a lackluster recovery from it, and then the startup of a war when Russia invaded Ukraine, and the geopolitical fallout from that. At the same time, we're in a period where inflation has accelerated, and central banks are raising rates to try to combat inflation that is excessive in the European Monetary Area and globally. The July report for industrial production across the monetary union for these reporting members still gives us a very mixed picture of what's going on; developments in the third quarter-to-date are not particularly encouraging.