French and Italian quarterly production utilisation figures are out and they’re not pretty.
First, JP Morgan’s David Mackie reminds us why they are important:
Capacity utilization plays a critical role in our thinking about the Euro area.
Given the lags in the production of the official output data, it influences our view of high frequency developments in production.
Because the denominator is influenced by the capital stock, the level of capacity utilization seems to play an important role in capital spending decisions.
It is a key determinant of pricing power and thus it is very significant in our Phillips curve for the region which drives our core inflation forecast.
And, last but not least, it plays an important role in our ECB forecasting tool, as it influences the appropriate policy rate.
And to today’s numbers. In France, capacity utilisation fell to 75.8 in January from 82.2 in October — the biggest decline ever seen. The previous largest drop was 2.1 points between July and October last year, according to JPM, and before that 1.7 points at the beginning of 1993.
In Italy there was also a significant decline, to 69.9 in January, from 74.4 in October. The charts are below, but in in Mackie’s opinion, the readthrough is as striking as the numbers:
At the moment we only have manufacturing output data through last November; on the basis of the collapse in capacity utilization, output fell very, very dramatically in December and January. Furthermore, this collapse in capacity utilization suggests a big decline in capital spending and inflation in the months ahead…
The European-wide figures come out on Thursday in the European Commission’s quarterly report; based on these numbers, we’re expecting more ugly.
Barclays’ Julian Callow, for instance, elaborates:
Tomorrow (10am Ldn time) the European Commission releases its regular monthly survey of business and consumer sentiment, and along with this the results of its more detailed quarterly survey of European industry, a particular focus of which will be capacity utilisation. Based on our estimates, including today’s French and Italian data, we estimate that the euro area capacity utilisation rate fell in January by a record quarterly drop of 6.8pp, to a record low (in its 23 year history) to 74.9%, down from 81.6% in October, and therefore well below its long-term average of 81.9%.
…
Note that our euro area GDP projection is for GDP to contract by 1.6% this year, a bit worse than the January Consensus Economics estimate of -1.4% (down from -0.9% in Dec 08), and well below the Eurosystem staff mid-point projection of -0.5% from early December 08. While the Governing Council has effectively admitted that it needs yet again to cut this projection significantly again (hence the Jan. rate cut),
nonetheless it may yet be unprepared for just how much it will need to do so. In short the scale of collapse in the industrial, construction and service sectors is unprecedented in Europe’s (and the world’s) history the past half-century.
Merde.
Related links:
Depression *alert* – FT Alphaville
Bankers’ greatest fear – FT Alphaville