The economic momentum is still weak in the Euro Area. Industrial production data for May dropped in Euro Area largest countries, Germany, France, Italy and Spain, but also in the United Kingdom. For the first three countries, carry over growth, at the end of May, for the second quarter is negative.
Companies’ surveys for June in the Euro Area have also shown that the current dynamics was weak except in Spain. This means that there is a risk on GDP growth numbers for the second quarter. We will wait on the publication of the Euro Area data (July the 14th) on industrial production to possibly change my forecast for the second quarter. In the UK the NIESR has published its forecast for the second quarter at 0.9% (non annualized). For them, the negative number for May was temporary. In the UK, Markit (see here) and CBI surveys are high. The momentum is different from the rest of Europe.
In France, the drop of the industrial production index was deep in May. Without a strong rebound in June we can expect a zero growth number for the second quarter. The figure could even be negative. (The probability of the rebound is low as surveys in the manufacturing sector in June were all negative)
Inflation rate was at 0.5% in June in France. Current production momentum is weak and there are no pressures on prices: not a strong framework for France.
The recovery in the Euro Area is probably weaker than expected and sometime cannot be found. This is the case for France and Italy mainly.
Measures announced at the beginning of June by the ECB are not sufficient to strongly support internal demand. This will be the role of the TLTRO (see here for details) that will be put in place in September and December. Due to the current weakness, may be will it be too late and not large enough?
Saying that differently, internal demand is not strong enough (see here)and the ECB measures are probably not large enough to change its trend.It will not be a strong and long-lasting support for growth.
Seven years after the beginning of the crisis, households’ indebtedness is still very high (higher than before the crisis see here) and the demand which is addressed to companies is still weak (see the fourth chart on this post here). We cannot expect that the euro exchange rate will be lower in order to improve Euro Area competitiveness and its production: only politicians can expect that.
In other words, there is a need to reinforce internal demand and to reform the current production framework. This latter could help, at the end, to improve productivity.
Germany has already done a large part of the job. Its employment level is high and its unemployment rate is low. They could just increase wages to boost internal demand creating a more favorable environment in the Euro Area. Spain has made a lot of effort. We see that its unemployment rate has dropped and its unemployment was down for the 11th consecutive month in June. For France and Italy there is a lot to do. There are high expectations in Italy with Matteo Renzi. For the moment it is mainly expectations. France is late and the recent (this week) social summit was not convincing. There is no collective dynamics and this summit has not changed this issue. We cannot expect a rapid change in trend and the economic horizon will not stretch out for consumers and companies. They will not have the will and the capacity to take more risks.
The main problem today in France is that we do not know how to improve this collective dynamics. In the “Trente Glorieuses” and even until the beginning of the crisis, the convergence to this collective dynamics was quite automatic. This is no longer the case and we don’t know which kind of framework we have to use to improve the situation. But it’s clear that in France we have no time to lose if we want to keep playing with Germany and others.
Industrial Production in the Euro Area and in the United Kingdom
The first chart shows the monthly change of the industrial production index since the beginning of the year. We don’t see a strong and sustained recovery in these figures. They are all negative in May. In France INSEE explains that it could come from all the off days. But this was not the case for every country mentioned in the chart, so not really convincing.
Carry over growth is positive for Spain at the end of May for the second quarter (+1% after 0.7% in first quarter) and for the United Kingdom (0.2% after 0.7% in Q1). But carry over is negative in Germany (-1.1% after +0.8% in Q1), in France (-1.15% after -0.6% in Q1) and for Italy (-0.7% after 0 in Q1).(non annualized rate)
The second chart shows industrial production indices since 2008. We cannot see a strong boost in economic activity. The trend is positive in Spain and the United Kingdom but it is not an irresistible one. The French profile is problematic. It is trending downward and is just 3.7% higher than the trough seen in April 2009. The index is still 15.3% below its average of the first half of 2008. The recent divergence with the UK is interesting but problematic.
The third chart is just here to show that the current momentum is weak. Bars represent 3 month change of the industrial production index for the Euro Area and the line is the New Orders to Inventories ratio in the Markit survey. We see that this later is losing steam and the lack of new orders will be a drag for production in the coming months. Summer’s production data will probably be weak.
The case for France
French figures on industrial production for May that were published this morning show a slower dynamics during the second quarter; The negative carry over for the second quarter at the end of May can let us imagine a zero or negative GDP growth for Q2. That’s what the chart below shows.
Usually when industrial production drops by more than 4% (annual rate) the GDP growth number is negative. The carry over is -4.5% at annual rate (the 1.15% mentioned above but not annualized) in Q2. This could be consistent with a negative GDP growth
With a zero GDP growth in Q2, carry over for 2014 would be 0.3% at the end of Q2 and the expected growth number for 2014 would be close to 0.5% far from the 1% expected by the French government. This would have negative consequences on the budget deficit reduction and on the stability program for public finances.
This industrial dynamic will not rapidly change. The ratio of New Orders to Inventories has plunged below 1 in June as it is shown on the chart. The 6 month change of the industrial production index and the ratio have consistent momentum. A ratio below 1 is usually associated with a drop in industrial production. Demand is not strong enough to change and improve production plans. Production will continue to slow.
The chart below is just a reminder that inflation rates (with French update today) are low. Germany is a little higher but 0.95% is not high. The situation is complex for France, Italy and Spain and of course for the Euro Area. The weakness in the economic activity will not create new pressures and the competitiveness framework (lower charges and lower wages) that has been put in place in the Euro Area will not change the trend.
For the specific case of France, inflation rate is 0.5% in June (0.6% for the harmonized index) and the core inflation rate is just 0.1%. It’s a historical low for the core index (already seen in January)
Carry over for the inflation rate is a meager 0.6% for 2014 at the end of June.
As INSEE mentioned it there is a seasonal effect as summer sales have started earlier this year in June. But it is not sufficient to explain the trend.
Analysis of the inflation rate shows that the services sector has a positive contribution but it is a little lower than before the crisis. The main reason for this positive figure is that services are mainly domestic and are not too open international competition. This is not the case for manufacturing products. Foods have an important negative contribution and energy is almost neutral.