Economy in Brief

Broad and severe weakness in European production: industrial production data for the monetary union turned decidedly sour in January. All major production categories showed declines in January, including the headline series for production excluding construction and manufacturing output. There were also drops across the major manufacturing sectors—consumer goods, intermediate goods, and capital goods—as well as in both of the consumer sub categories of durable goods and nondurable goods. January was a really tough month for the industrial sector and the European monetary union.

Sequential output weakness as well: Output is not only falling in every category in January—and for two months in a row—but the sequential growth rates over 12 months, six months, and three months also show decelerations present for all of these categories of output except capital goods. That means the six-month growth rate is weaker than the 12-month growth rate, and the three-month growth rate is weaker than the six-month growth rate for six of seven of these categories—the exception is capital goods. And capital goods are a minor exception with the growth over three months only slightly stronger than over six months, and at that it's still a negative growth rate. It shows a decline in output, just a slower decline. There is no silver lining here, just clouds and rain.

Quarter to date and more: As if that's not enough, these are output data for January so we can calculate quarter-to-date growth rates in the first quarter. On that basis, all seven of these categories show output declining, and output is declining in all seven of these categories at a double-digit pace! In addition, when we step back to compare growth rates over the last year with previous 12-month growth rates back to April 2006, a 20-year horizon, we find that all the growth rates in the table lie below their median rates of growth for this previous twenty-year span. Capital goods fare the best, with a percentile standing of its growth rate at its nearly 48th percentile, just slightly below its median, which lies at a ranking of 50%. The growth rates for consumer nondurables, for example, have had output growth weaker during this period, only 1.7% of the time. Consumer goods output has been weaker, only 3.8% of the time. Manufacturing output is in the bottom quartile among historically ranked growth rates. These are extremely bad and consistently poor rankings for industrial growth.

The table also offers up country-by-county data for January. Looking just at monetary union members, seven of twelve show output declines in January, but that compares to December, which was a strong month with only three of those members showing output declines. However, a month earlier, in November, eight monetary union members had shown output declines. There are sequential output declines reported by Germany, Spain, and Ireland over the last twelve-to-six-to-three months. Only Malta and Greece show output trends that are accelerating, and of course, these are two of the smaller monetary union countries. Seven monetary union countries show quarter-to-date output is declining early in this first quarter. Among the five countries showing output increasing, two of them showed double-digit growth rates in the new quarter and those two again are Malta and Greece. For the countries overall, only five of twelve have queue percentile standings of their earlier growth rates that are above their historic medians for the last 20 years. That list of five includes France, Malta, Greece, Portugal, and Austria.

The industrial data for Europe in January are decidedly downbeat and concerning. These numbers are being reported before hostilities in the Middle East began to ramp up and clearly before oil prices spurted higher. The European manufacturing sector is not digging itself out of the hole it fell into after COVID and the invasion of Ukraine. And after showing a hint of recovery, it now appears to be deep in the morass of economic weakness.

Japan's Ministry of Finance business outlook survey shows a slow but positive improvement in the outlook for employment among large firms, while the outlook for large manufacturing firms’ hiring continues to cycle and oscillate around zero (see Chart).

The assessment on current observations of the economy slipped to +4.4 for all large enterprises in the first quarter of 2026, compared to +4.9 in the fourth quarter of last year. For large manufacturing enterprises, the assessment slipped to 3.8 from 4.7. There were also slippages reported for medium-sized enterprises as well as for small enterprises; for both the total and manufacturing sectors, assessments were worse, the smaller the reporting unit (on both a net reading basis and a percentile standing basis).

The quarter-ahead assessment slipped to 3.7 from the 4.4 assessment of the first quarter for all large enterprises. For large manufacturing enterprises, the outlook slipped from plus 3.8 in the first quarter of this year to -1.1. The second quarter ahead outlook, however, improved to 4.7 from 3.7 for all large enterprises, and the manufacturing outlook for two quarters ahead picked up to 3.3 from -1.1 in the quarter ahead. However, that 3.3 outlook for large manufacturing enterprises is still below the first quarter assessment (of 3.8) as well as below the fourth quarter and the third quarter assessments of 2025.

The percentile standing of the quarter-ahead assessment for all large enterprises is 44.6. For manufacturing firms, the percentile standing is 38.4, and for nonmanufacturers it is 62.2. The percentile standing values compare the current observation with a history of observation readings back to 2007; values above the 50th percentile are above their historic medians. We can see for the quarter ahead for large enterprises all of their responses are above their medians, and the relative strength resides among nonmanufacturing enterprises; they report the highest standings.

For the second quarter ahead, the percentile standings slip for the total group of large enterprises as well as for manufacturing and nonmanufacturing, separately. This occurs even though the net assessments improve from the quarter ahead to two quarters ahead. You can get an inkling ‘why’ by looking at the ‘average’ and noting that the average two-quarter ahead reading has been higher than the average quarter-ahead reading. So, to rank higher than the quarter-ahead, the second-quarter ahead has a higher hurdle to go over. The standing for nonmanufacturing slips from a 62.2 percentile for the quarter ahead to a 58.1 percentile standing for the second quarter ahead. Large manufacturers take a relatively large step back to a 28.4 percentile standing two quarters ahead from the 38.4 percentile for one quarter ahead. These step backs are reflected in the headline which steps back to 37.8 for two quarters ahead from a 44.6 percentile standing for the first quarter ahead.

What is evident in this survey is that large enterprises that the MOF surveys are becoming increasingly pessimistic as we look farther into the future, since the current rankings for all large enterprises, large enterprise manufacturers, and large nonmanufacturers show the strongest percentile standings among this triad of readings for the current quarter, with the quarter-ahead standings weaker and two-quarter-ahead standings weaker still. This growing pessimism is not a good feature.

Medium and small enterprises not as dismally inclined Medium-sized firms: The transit to greater pessimism that we see for large enterprises as we look further into the future does not carry over to medium enterprises. Medium enterprises do see lower readings for the quarter ahead compared to the current-quarter assessments, and generally the quarter ahead provides assessments that are below the 50% mark, making them below median expectations as well. However, for two quarters ahead, the percentile standings improve, and at least for medium-sized manufacturing enterprises, there is a reading above the 50-percentile mark for that category two-quarters ahead, putting it even above the 45.2 percentile reading posted for the current quarter.

Small firms: For small enterprises, there is no real generalization across the various types of firms. Manufacturing firms’ percentile standing from the current quarter to the quarter ahead just about halve themselves, a sharp step back for manufacturers. However, for nonmanufacturers, there's an improvement from a 56.2 percentile standing in the current quarter to a 60.3 percentile standing in the quarter ahead. These two groups are moving in opposite directions for two quarters ahead. Manufacturers stop that deterioration and gain back just a small measure of what they lose in the quarter ahead with their two-quarter ahead standing, while nonmanufacturers lose some of their ebullience as the percentile standing drops to a 50.7 percentile reading from 60.3 but still sports an above-median value.