Global Daily – Modest expansion in EZ industry cannot prevent double dip

by: Aline Schuiling

Euro Macro: The eurozone industrial sector continues to expand – Tomorrow (Fri 23 Oct) the flash estimate for the eurozone PMIs in October will be published. The manufacturing PMI is expected to decline somewhat but remain above the 50 boom-bust-level that separates contraction from growth. Our own forecast for the manufacturing PMI is that it will decline to 53.2 in October, down from 53.7 in September, which is very close to the consensus forecast.

An outcome in line with the expectations would mean that production in the manufacturing sector continued to expand after it collapsed during the period March-April. Importantly, the second wave of Covid-19 infections in the eurozone has not resulted in the type of strict lockdown measures that would result in large numbers of industrial employees staying at home. Therefore, the initial sharp rebound in production in May and June that took place after the first lockdowns, was followed by ongoing, albeit modest, recovery. Having said that, in August (the final month of production data published by Eurostat) the level of production still was more than 5% below pre-pandemic levels. The break down in main components shows that production of capital goods has remained particularly weak and was more than 9% below its pre-pandemic level in August, versus -3.5% for consumer goods and -5% for intermediate goods. This break down in types of production also seems to be reflected in the differences between the main countries. For instance, production in Germany (relatively heavy weight of capital goods) still was 11% below pre-pandemic levels in August, whereas in Italy (relatively heavy weight of consumer goods) total production already recorded a plus of almost 2% versus pre-pandemic levels.

Looking forward, we expect growth in production in the eurozone as a whole to remain subdued as private consumption and fixed investment in main countries and regions will continue to be depressed by weak labour markets and rising corporate defaults, particularly when temporary fiscal support packages are unwound. Therefore, we expect the level of production in the eurozone on aggregate to remain below pre-pandemic levels well into 2021. Moreover, the industrial sector is just a part of the eurozone narrative. The industrial sector has a much lighter weight in total GDP than the services sector – and the services sector is in much weaker shape than industry, and is also expected to contract in the coming quarters. As a result, the gradual recovery in industry will still not prevent a double dip in GDP growth. (Aline Schuiling)