Industrial production fails to match positive sentiment indicators and gives the Eurozone economy a stumbling start to the final quarter of 2016
Industrial production in the Eurozone disappointed as it dropped by 0.1% MoM in October, from -0.9% MoM in September. It was the second time this year that industrial production dropped in two consecutive months. On the year, industrial production was still up by 0.6%, from 1.3% in September. However, today’s drop is a cold shower for Eurozone optimists and shows that the real economy is clearly running behind rather positive soft indicators.
Today’s weak industrial production data adds to a rather disappointing long trend. Over the last six years, average monthly growth in industrial production has been zero. The industrial weakness in the Eurozone does not only look cyclically but also structurally.
Looking at the year 2016 through the rear-mirror, the optimism on the investment outlook of the first half of the year disappeared almost entirely in the wake of the Brexit vote and new political uncertainty. According to a recent European Commission survey, managers had sharply revised downwards their investment expectations for 2016 from a growth rate of 6% in April to roughly 1% in November. Once again, optimism in the Eurozone turned out to be stronger than reality. For 2017, the November survey showed much more muted optimism regarding the investment outlook for the entire Eurozone.
Looking ahead, stagnating industrial production and political uncertainty are clearly not the best breeding ground for the long-expected pick-up in investment in the Eurozone. Against the background of rather subdued prospects for Eurozone investments, the ECB’s latest projections of annual investment growth of 3% in 2017 and 2018 look in our view rather optimistic. Consequently, it will still take some time before the Eurozone recovery will become fully self-sustained. For now, the recovery will remain highly dependent on monetary policy.