It was a poor month for industrial production in Europe’s major economies in December as output slumped towards the end of the year. In the UK, industrial production contracted by 1.1% over the month in December – the biggest monthly drop since September 2012. Expectations were for a much smaller fall of -0.1%. Manufacturing also had a bad end to the year, with output declining by 0.2% month-on-month versus estimates of a 0.1% rise.
On a year-on-year basis, industrial output was 0.4% smaller in December – the first time since 2013 that annual growth has been negative. Meanwhile, manufacturing output headed deeper into negative territory, declining by 1.7% on a 12-month basis. The slump in oil prices was to blame for the big monthly drop in industrial production, which has negatively impacted the UK oil and gas sector.
Quarterly figures were also published together with the December numbers. Industrial output declined by 0.5% between the third and fourth quarters. This compares with a decrease of 0.2% in the preliminary estimates used for calculating fourth quarter GDP growth. Today’s data increases the likelihood that UK quarterly GDP growth for the fourth quarter will get revised lower to 0.4% in the second estimate from 0.5% in the initial estimate.
It was a very similar picture in Europe’s other large economies, which also saw a drop in production during December. German industrial output fell by 1.2% month-on-month in December, missing estimates of a 0.4% increase. French industrial production was down 1.6%, below estimates of 0.2% growth, and Italian output in December was 0.7% lower than in November.
The figures are likely to fuel concerns that the slowdown in global trade that’s being led by emerging economies is starting to significantly impact the growth prospects of advanced economies.
Germany, which is very export dependent, could be the worst hit, although strengthening domestic demand could cushion its economy from the impact. The UK also has healthy domestic demand supporting the economy but is vulnerable because of an already existing large current account surplus. Growth in Italy and France has been gathering pace over the past year but their recovery remains fragile. A further deterioration in global demand could push their economies back into recession.
In the currency markets, the weaker-than-expected data had limited impact on the euro and the pound as traders are more focused on the current developments in stock markets and oil prices, as well as the Fed’s Yellen’s testimony to Congress later today, which should provide some insight to the Fed’s next move.
The euro quickly recovered yesterday from the small dip following the German data, climbing to 1.1338 dollars on dollar weakness. It has retreated to around 1.1260 dollars in mid-European session today on the dollar rebound and the French and Italian figures further weighing it down. The pound was surprisingly resilient though after the data and started to rally after a brief spike down to 1.4437 dollars. Sterling was last up at 1.4537 dollars, while the euro was weaker versus the pound at 0.7738.
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