Euro area industrial production shrank in Q2, as energy pays back

Euro area industrial production (IP) declined by 0.4% m/m in June, broadly in line with our below consensus expectations. This is consistent with an annual growth rate of 1.2% y/y, down from 1.6% y/y. May data was revised by down 0.2pp to -0.2% m/m, while Q1 growth was unchanged at 1.0% q/q.

Today's data confirms that after solid growth in Q1, euro area industrial production moderated markedly in Q2, shrinking by 0.2% q/q. Over the quarter, weakness appears to have been driven mainly by a payback from the energy sector (-2.7% q/q in Q2 after 2.3% q/q in Q1), while manufacturing production slowed to a lesser extent (from 0.8% q/q in Q1 to 0.2% q/q in Q2). Slight positive news came from capital goods production, which held firm at 0.7% q/q, after 1.0% q/q growth in the previous quarter (Figure 5). Despite industrial activity's notable slowdown,

"We maintain our euro area Q2 GDP forecast at +0.4% q/q carry-over for Q3 (assuming July to September IP coming in flat) is also slightly negative at -0.3% q/q, but positively orientated business surveys suggest that modest growth is likely", says Barclays.

In June, weakness was broad based in terms of countries, with the exception of Spain and the Netherlands. German IP dropped 0.9% m/m on weak construction and manufacturing production. This led to a moderate industrial activity growth of +0.4% q/q in Q2, attaching slight downside risk to German Q2 GDP forecast. In France, IP posted a small decline of 0.2% m/m and manufacturing failed to gather momentum, highlighting that the current recovery is still lacking a stable footing. Italian IP fell by 1.1% m/m, but it rose 0.4% q/q in Q2, just a notch below the rate of growth printed in Q1 (+0.5%), and consistent with the view that growth has advanced by 0.3% q/q in the second quarter of the year, similar to Q1. Once again, positive news came from Spain, where IP was up by 0.6% m/m, pushing the Q2 IP growth to 1.4% q/q.

"Recent business surveys suggest that growth should moderate slightly in Spain, although remaining at healthy levels. Finally, the rebound in Dutch IP (+3.9% m/m) did little to offset the sharp contraction recorded in the past few months (mainly linked to plunging mining and quarrying production following the government decision to cut gas production): Dutch IP shrank 5.8% q/q in Q2", notes Barclays.