Recent data on the German industrial production show a rapid drop in the economic activity. The quarterly change was already at -5.5% in the third quarter (annual rate). At the end of November, the carryover for the last quarter of 2018 is at -7.8%. There is a strong consistency between the quarterly change in the industrial production index and the GDP as it is shown on the graph. During the third quarter of 2018 the GDP was down -0.8% and related to the strong decrease in the German production this winter, the GDP may again shift downward in the last quarter. Germany would then be in recession. The impact could be strong on the Euro Area’s momentum and leading to a downward revision of the EA growth forecast (the starting point for 2019 would be lower). The convergence to potential growth (1.6%) would then be quicker than expected. The ECB will not change its monetary policy before long.
Post Hoc Ergo Propter Hoc
During the debate on the French Presidential elections, one contender has presented a graph showing a divergence between industrial production in Germany on one side and in France, in Spain and in Italy on the other. For Marine Le Pen the Eurozone was the explanation. There is a divergence but that’s not that simple.
Later in the debate, Le Pen said that the UK performance was exceptional compared to France. One reason was the capacity for the UK to manage its currency.
The temptation is strong to show a graph with industrial production in France and in the United Kingdom. I did it with indices rebased at 100 in 1999 (Eurozone inception) Profiles are the same. It means that the explanation related to the Euro is not relevant as UK doesn’t have the Euro as a currency.
The profile of the French economy cannot be read only by its membership of the Euro Area. This issue is more complex than a sentence in a debate. The economy is not as simplistic as some wants to present it.
After the deep drop in the ISM surveys for August (see here and here) we have had two new important data. Retail sales were down by -0.3% in August after +0.06% in July and core retail sales were down -0.1% in July AND in August. Therefore carry over growth for Q3 at the end of August was 1.8%% at annual rate (after 6% in Q2) for retail sales and 0.7% for core sales after in Q2. Q2 data were exceptional and not the beginning of a strong trend.
The risk is a low contribution of households’ consumption to GDP quarterly growth. Households’ expenditures were a strong support for GDP in the second quarter. This will probably not be the case for Q3. This means a probable downgrade of growth for 2016. We were at 1.4% for the whole year, it will probably be lower.
After a rebound in July (+0.6%), the industrial production index was down in August (-0.5%). For the manufacturing index data were -0.4% and +0.4% for August and July. Therefore carry over growth for Q3 at the end of August is a modest +2.3% (at annual rate) for the industrial index (after -0.6% in Q2) and for the manufacturing index data were +0.7% and -1% respectively. The momentum is still low. The YoY comparison shows that the industrial index is down by -0.7% and the manufacturing index is up by just 0.1%.
After the ISM, employment it is now retail sales that follow a weak trend while the industrial production index is neutral. Where is the risk of an overheating economy mentioned recently by Eric Rosengren from the Boston Fed. It was a cool summer in the US and the Fed has absolutely no reason to change its monetary policy at its next week meeting
Rebound of the UK consumer confidence index in August
After the referendum on Brexit, June the 23rd, households were worried by the consequences of the “Leave” option. They thought that the impact would rapidly be negative. The consumer confidence index dropped deeply in July. It was driven by the uncertainty related to the 12 month outlook for the economy.
The downturnin the USindustrial sectoris confirmedmonth after month.September’s figuresdo not invalidatethe trend observedsince the beginningof the year. Thetensionindicator,productioncapacity utilizationrate,follows a downward trend sinceJanuary.Herefor an easier readingand for a rapid comparisonwiththe unemployment rateI putexcesscapacity(100–Utilization Rate). Since the early90sthe reversalof this indicatoris alittle ahead ofthelabor market. There may bestillfor a few monthsa divergentdynamics between the2.
Nonetheless past developmentssuggest thatlower tensionsonthe production sidepull, at the end of the day, theunemployment ratewith it.Theslowdownwould then berecordedand the Fedwould beeven morereluctant toget toughon monetarypolicy.
The first point is the upward revision of the Euro Area growth figures for the first and the second quarter of this year. During the first three months, the economic activity was upgraded by 0.1% to 0.5% and during spring GDP figure was inched up by 0.1% to 0.4% (2.1% and 1.5% at annual rate respectively). Carry over growth for 2015 is 1.2% at the end of the second quarter (average growth for 2015 if the GDP level remains at Q2 level for Q3 and Q4) The growth number for 2015 should be close to 1.5%. It will probably be not hard to converge to this figure; I expect that oil price (Brent) will remain below USD 50. This would be a little higher than ECB’s forecasts at 1.4% published last week. Continue reading →