Spain vs. Germany vs. UK: production trends showing holes in some growth stories
Eurostat reports new orders for January:
In January 2011 compared with December 2010, the euro area1 (EA17) industrial new orders index2 rose by 0.1%. In December 20103 the index grew by 2.7%. In the EU271, new orders increased by 0.2% in January 2011, after a rise of 2.9% in December 20103. Excluding ships, railway & aerospace equipment4, for which changes tend to be more volatile, industrial new orders increased by 1.6% in the euro area and by 1.9% in the EU27.
This was a disappointing report, as Bloomberg consensus was expecting a 1% monthly gain. The Eurostat press release reports new orders by country and production type only(capital, consumer, intermediate, durable, and nondurable). However, I look at the origination of orders by region: domestic, non-domestic extra-euro (which is the same as non-domestic for the Euro area as a whole), and non-domestic intra-euro.
Exhibit 1: Spain’s industrial sector is barely growing amid fiscal austerity
No industrial production growth = a big problem. It’s not just fiscal austerity, per se, it’s that the economy needs plenty of nominal income gains to improve the cyclical budget deficit in order to even see the benefits of structural adjustment. The structural balance cyclically adjusts the government deficit (or surplus) for non-structural items to leave just the structural deficit (net spending on pension payments, unemployment insurance, normal capital expenditures, etc.).
Without growth to increase nominal revenues, the negative cyclical balance will keep the overall balance very much in the red. Spain needs growth! Apparently, it’s not coming from the industrial sector.
Spain was deriving quite a bit of industrial demand from within the Eurozone (the red line in the chart above) through the end of September 2010; however, that source of order growth is tapering off. Now, it seems that extra-euro industrial orders growth (the green line) may start a sideways trend, too. Normally I wouldn’t put too much stock in one data point – but with tightening across Asia and possibly the UK (not the US for a bit), slower orders growth is inevitable.
Exhibit 2: The German industrial machine
The German machine is also deriving industrial production growth from extra-euro orders. Notably, too, domestic orders have been strong. But for all of the talk about Germany’s overheating export sector, industrial production is still near 6% below its Q1 2008 level.
Exhibit 3: The poster child for fiscal austerity, the UK.
Why? Because they’re nominal exchange rate depreciated quite markedly, allowing the trade-sensitive industrial base to find a very shallow bottom. On a trade-weighted basis, the British pound is 24% lower than in mid-2007, according to the JP Morgan nominal effective exchange rate index.
I’d like to hear how you all think that Spain’s going to get through this as the ECB raises short-term rates (for those of you who do not know my Euro-centric commentary, you can see a list of my recent commentary on the Eurozone, which includes articles on the ECB by my name on the AB sidebar), Germany slows, the US struggles to keep the consumer alive, and emerging Asia tightens its belt.
Spain’s a trillion dollar economy, and the fourth in terms of GDP in the Eurozone…