Last week’s national data on industrial production (IP) in November were decidedly disappointing, surprising to the downside. A number of erratic factors remain in play, obscuring the underlying strength of activity. But it seems clear that there was a broad-based contraction in activity. The slump in industrial production in November will clearly weigh on headline growth in fourth quarter (Q4) 2018. The December ECB forecast for Q4 (0.4%) already looks optimistic.
In Germany, industrial production fell by almost 2% on the month in November, hot on the heels of a near 1% decline the previous month. A technical recession in the production sector – that is, consecutive quarters of contraction – therefore looks extremely likely. There are a number of erratic factors that have had a meaningful impact on the numbers:
- The drag on production from the problematic transition to the new Worldwide Harmonised Light Vehicle Test Procedure (WLTP) in the auto sector
- The impediment to transportation and hence activity thanks to low water levels on the Rhine
- A public holiday in November falling on Thursday which often leads to workers taking additional leave
- A sudden reversal in what had been a sustained surge in the level of activity in the pharmaceutical sector (which might not survive the eventual revisions process)
Still, leaving all these excuses to one side, there was still a broad-based decline in activity that is hard to excuse away.
Pausing for a second to consider one of these erratic stories – the weakness in the autos sector – we have been gradually revising our previous view on the relative importance of the transitory supply and potentially persistent demand explanations for the weak numbers in recent weeks. As per usual, the leading November VDA (German automotive industry association) data gave a pretty accurate – and disappointing – steer on the month to month movement in production in the auto sector.
The December VDA data is not reassuring either. The orders numbers are more reassuring, with orders rising in excess of 4% on the month, which at the margin leads to optimism that a bounce-back will materialise in first quarter 2019. However, that optimism needs to be put into context: outside the car sector, orders were weak.
Turning back to the national data, French IP was down by 1.3% in November, reversing the 1.3% gain the previous month. The erratic factor in France is well known: the gilets jaunes movement. The disruption caused by the protests appears to have contributed to a drop in excess of 10% in production in the energy sector on the month, exacerbating the decline in the headline numbers. The impact of the yellow vests’ protests could be more widely felt; especially in the retail sector. So growth is likely to be modest in France in the fourth quarter too.
Finally, we note that production was also down in the United Kingdom and Italy. In the former, solid growth in services and an impressive increase in activity in the construction sector ensured that there was still a respectable 0.2% expansion in GDP on the month. In truth, the UK economy is performing pretty well, under the circumstances. However, it is less clear that the Italian economy will escape another contraction in Q4 and that may trigger a resumption of tensions between Brussels and Rome.
On 14 January 2019, Eurostat published data showing that eurozone industrial production fell by 1.7% between October and November, further highlighting the pressures facing the region’s manufacturers (see Exhibit 1). The fall was the sharpest since February 2016.
Exhibit 1: Changes in industrial production in selected eurozone countries (year-on-year change in %)
Source: Datastream, Eurostat, BNPP AM as of 14 January 2019
So much for the data on production for late last year, what can be said about the current pace of growth? We still have erratic factors to contend with. On the one hand, the bounce-back in car production should lift activity in Q1; on the other, bad weather is likely to disrupt activity. But we should not lose sight of the fact that significantly lower oil prices and somewhat looser fiscal policy in Germany, France and Italy both point to stronger expenditure this year. And more generally the fundamental determinants of domestic demand still look sound. Nonetheless, these numbers raise our concerns.
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