Production increased significantly in December, reversing the annual decline. However, this is largely due to Irish production statistics, which are notoriously volatile thanks to contract manufacturing and outsourcing. However, other countries also saw small increases on average. January's data confirms that this rise was temporary, as other manufacturing indicators continue to be weak.
This reversal was driven solely by Irish production, which fell by 29% after increasing by 19% in December. A more mixed picture was seen in other countries, with Germany and Spain posting modest growth of 0.6% and 0.9% month-on-month, while production in France fell by 1%.
The downward trend in production seemed to have finally bottomed out somewhat in the fourth quarter, but January threw a cold water on those hopes. Production numbers in January are in line with the declining trend up to October last year. This means that in the short term, the industry is likely to contribute negatively to GDP growth in the first quarter, unless February and March are significantly better than expected. This means that the euro area has yet to show solid evidence that it is emerging from a long period of economic stagnation.
There are further signs that the industry is bottoming out, which could result in slightly better performance in the second half of the year. A recovery is likely towards the end of the year as the inventory cycle peaks and consumers redeem their purchasing power as wage growth picks up and inflation remains moderate. Again, the problem isn't just related to cycles. Structural problems in euro area manufacturing appear to be worsening, consider, for example, geopolitical issues related to energy-intensive sectors and trade. This means there is limited upside room in the medium term.
