The Week In The Eurozone: Sharp Payback In The Industry

Manufacturing production fell for the second month in a row in September (-2.3% m/m, after -0.3% m/m in August). Production in capital goods, which represents more than a third of total industrial production, even decreased by 3.5% m/m. The decrease in industrial production was less impressive (-1.8% m/m, after -0.4% m/m) in line with an increase of activity in the construction sector (+2.7% m/m) but the industrial production was down by 1.1% year on year.

Industrial activity resisted to the effects of the sovereign debt crisis in Q3 2012 (+0.7% q/q, after 0% in Q2 2011) and GDP may slightly increase in Q3 (released on 15th November). However the effects of the crisis in eurozone are more and more obvious in Germany, where the end of the year may be less favourable. Indeed firms should again adjust their production to a low demand.

In September, new manufacturing orders also fell for the second month in a row (-3.3% m/m, after -0.8% m/m in August) and were down by 4.6% y/y. This decrease was mainly due to a drop in foreign demand (-4.5% m/m), which accounts for more than 50% of total orders, and in particular from the eurozone (-9.6% m/m, after +1.8% m/m). They fell by -3% q/q in Q3 2012 (after +1.5% q/q in Q2 2012).

The sovereign debt crisis seems to weigh more and more on German economy, orders from non eurozone countries couldn’t offset the weakness of the demand of eurozone countries in Q3 2012. Orders from non eurozone countries also fell in Q3 2012 (-1.2% q/q, after +1.1% q/q in Q2 2012). The decrease of 2.5% m/m in goods exports in September came after a rose of similar scale the previous month, but it could also suggest a slowdown more pronounced in exports at the end of the year.

The weakness in external demand spread to the whole economy, as shown by the drop in domestic demand (-2.7% q/q au Q3 2012, après -0.3% q/q au Q2 2012). The drop in demand and the climate of uncertainty weigh on investment. Indeed, the drop the decrease in domestic capital goods orders (-3.6% q/q in Q3 2012), which suggests an unfavourable development of investment, sharply contributed to this decrease.

The decrease of 2.3% q/q in manufacturing orders (after +0.5% q/q in Q2 2012) is concerning. Moreover surveys also suggest a weak manufacturing activity at the end of the year. Likewise, the October IFO index and the manufacturing PMI (at 46) point still to a contraction in activity. Indeed, private consumption and foreign demand from outside the eurozone should underpin activity but offset with difficulty the negative impact on German exports, which represent around 50% of GDP, of the ongoing recession in some eurozone countries.

France: industrial plunge
French industrial production (IP) collapsed 2.7% in September, pulled down by an even sharper 3.2% fall in manufacturing output. Declines of this magnitude are rare. This is in fact a payback effect, a harsh one but it was expected after two strong monthly increases (totalling 2.9% between July and August in the manufacturing sector) which had occurred despite the deterioration in business confidence surveys.

The July and August IP rise was all the more surprising than it was supported for a good part by a robust increase in the motor vehicles segment, which was hard to square with the drop in new cars registrations. These good figures were not sustainable and the awaited correction duly took place in September.

For the whole Q3, manufacturing output manages to be up 0.9% while industrial output remains unchanged. This raises the odds of a similar stability in Q3 GDP (figures to be published on November, 15). This corresponds to the INSEE forecast but not to ours. We maintain our forecast of a mild GDP contraction because of the downside risks weighing on growth (-0.1%).

In contrast, the odds are not as good for Q4 GDP growth. Industrial production is suffering from a -1.2% carry-over and the same figure for manufacturing output is -1.4%. These figures are consistent with a -0.2% GDP decline, the higher activity in services helping to mitigate the contraction.

By Catherine STEPHAN, Hélène BAUDCHON