Economy in Brief

This week we turn to ongoing El Niño climate conditions and resulting implications for food prices and policy responses in Asia. El Niño effects have already started to depress crop yields in the region, with major producers such as India reeling from poor rice harvests. Consequent food shortages have exacerbated inflationary pressures in Asia, presenting renewed problems for authorities. Regional governments have responded with a range of measures, from price caps to import subsidies and even outright export bans. The scope for a major response from many governments in the region is limited however by the lack of fiscal policy space. Stimulus programs that were enacted during the pandemic have led to ballooning government deficits and debt in a number of economies in recent years. However, central banks face their own set of challenges too. By tightening monetary policy again to fend off renewed inflation challenges they could further tighten financial conditions, from already restrictive territory, and thereby hasten the onset of recessions.

Industrial output in the European Monetary Union rose by 0.6% in August following a sharp 1.3% decline in July and a small 0.1% increase in June. Sequentially output remains weak but without any clear developing pattern. Output is down 5.3% over 12 months; it's falling at a faster 6.7% annual rate over six months; it is falling at a slower 2.6% annual rate over three months. However, in the quarter-to-date with two months of data in-hand, output is falling at a relatively rapid 4.6% annual rate. Turning away from the headline (which is for industrial production excluding construction), manufacturing shows a clearer deterioration in place with a 5% decline over 12 months, a decline at an 11.8% annual rate over six months, and a lesser, but still very rapid, decline of 10.3% at an annual rate over three months.

Sector results find industrial production output mostly increasing in August, with consumer goods output up by 0.7% and capital goods output up by 0.3% offset only by intermediate goods with an output decline of 0.3%.

Sequential sectors Sequential sector results from manufacturing shows consumer goods with output falling 2% year-over-year, falling at a 5.8% annual rate over six months and then rising at a 0.7% annual rate over three months. Intermediate goods output falls at fairly steady 5% pace over 12 months, falling at a nearly identical 5.1% annual rate over six months and falling just a slightly less rapidly 4.4% annual rate over three months. Capital goods has a consistent pace of decline over 12 months, six months and three months, with growth rates clustered near an extremely weak 10% annual rate over each horizon.

Monthly country results Thirteen European Monetary Union countries offer early results for manufacturing industrial production. In August only three countries show month-to-month declines: those are Belgium, France, and the Netherlands. However, in July six countries showed month-to-month declines, while in June ten countries showed month-to-month declines. In June the countries showing increases in industrial production were Italy, the Netherlands, and Ireland.

Sequential growth in IP across EMU members Sequentially these 13 countries show output accelerating in half of them over three months and in half of them over six months, but acceleration occurs in only about 8% of them over 12 months. The accelerations compare three-month growth to six-month growth, six-month growth to 12-month growth, and 12-month growth to the period of 12-months ago. Acceleration data look somewhat better with essentially neutral readings over three months and six months showing that only half of the countries are experiencing output growth that is decelerating. However, in many cases this is because the decline in output – which is still in train- is occurring at a slower pace. Over three months nine countries show output declines; over six months twelve of thirteen-countries show output declines; that is the same number as over 12 months. Output in the monetary union in the manufacturing sector is still broadly declining; however, the pace of decline is not clearly accelerating as over three months and six months we see that accelerations are worse in only half of the members. However, quarter-to-date data show that eleven of thirteen countries are showing output declining with two-month data in for the third quarter.

Industrial production in the United Kingdom fell in August, dropping for the second month in a row. Manufacturing industrial production fell by 0.8% in August after falling by 1.3% in July. However, sequential growth rates over 12 months, six months and three months show expansion on each of those horizons, although without a clear tendency for growth to accelerate or to decelerate. In the quarter-to-date, industrial production is rising at a 0.5% annual rate with two months of data in place. The U.K. economy has generally struggled in the post-COVID period. Which also coincides with a post Brexit. Industrial production and manufacturing are down 3.9% in August 2023 compared with level on January 2020 before COVID struck.

Not only did headline growth rates fall in July and August, but sector growth rates also fell in both July and August. Sector growth rates fell in each one of the major sectors: consumer durables, consumer nondurables, intermediate goods, and capital goods. The largest decline was in consumer durables where output fell 2.5% in August after falling 3.7% in July; capital goods output fell by 1.4% in August after falling by 0.7% in July.

Sequential growth rates show gathering downward momentum for consumer durables where output falls by 4.8% over 12 months, then falls at 6.6% annual rate over six months and then accelerates to a 15.9% annual rate drop over three months. Consumer nondurables output, however, takes the opposite tact, rising by 4.5% over 12 months accelerating to a 5.3% gain over six months, and then accelerating to an 8.1% annual rate over three months. The consumer sector is caught between two completely opposite trends. Intermediate goods output shows some repair underway as output falls by 3.6% over 12 months; that decline is reduced to a -2.2% pace over six months and then output logs a 1.4% increase over three months. For capital goods, there's no trend apparent except that output increases on all three horizons advancing by 7.6% over 12 months and then slowing to a 2.3% annual rate over three months with a slight speed-up in between.

Quarter-to-date sector output trends are not uniform, which is not surprising after looking at the sequential trends. Consumer durables are falling at a 13.1% annual rate while consumer nondurables are expanding at a 6.3% annual rate; intermediate goods output is falling at a 2.9% annual rate while capital goods output is rising at a 1.2% annual rate- all in all, it’s a pretty mixed performance.

The table also produces some industry-specific data. The most interesting thing in the industry data is the weak performance of utilities output in the U.K. This is attributed to a substantial transition to energy saving devices, particularly electricity. The output of electricity, gas and water utilities is lower by 42.6% from January 2020. Overall manufacturing output is down by only 3.9% on this same timeline. This is an incredible difference; much of this owes to to the transition to energy-saving devices, particularly electrical devices. Over the same period, mining & quarrying output is down relatively sharply as well, while the three other listed industries in the table show increases ranging from a 3.9% gain in motor vehicle & trailer output to a 47.2% increase in textiles & leather.