The European industrial economy is on the back side of the business cycle. The slowdown started in early 2018, according to the year-over-year rate-of-change data for Europe Industrial Production, ITR’s benchmark for economic activity in the region. The annual growth rate peaked at 3.5% in April of last year and has been decelerating ever since.
The latest data (December 2018) indicates that the 12/12 rate-of-change currently stands at 1.4%; that is, Europe Industrial Production in the 12 months through December 2018 was up 1.4% from the 12 months through December 2017. However, if we look at Europe Industrial Production during just the fourth quarter (October, November, and December) of 2018, we can see that it was down 1.2% relative to the fourth quarter of 2017. To use ITR terminology then, -1.2% is the current 3/12 rate-of-change, and it has crossed into negative territory. This is a negative ITR Checking Point™ that implies further decline ahead for the annual (12/12) rate-of-change.
Unfortunately, this is not the only evidence of the slowdown currently occurring in the European industrial economy. Deceleration in Europe Machinery Production began in the second quarter of last year, and the current 3.3% annual rate-of-change (data through December) is less than half of its peak value of 7.0%, set in April 2018. The 3/12 rate-of-change is at 0.0%, signaling that further deceleration will occur in the first half of 2019.
The slowdown in Europe Motor Vehicle Production has been even sharper, particularly in the second half of 2018. Data through December showed that the 12/12 rate-of-change has declined to -1.9%, and the 3/12 remained substantially below that at -6.8%, indicating that things will likely get worse for the sector 12/12 before they start improving.
Finally, Euro Area Power Generation, Transmission, and Distribution are also faltering. As of December 2018, the annual growth rate (12/12) was at -0.9%, while the 3/12 was at -2.5%. Yet again, this shows that further decline in the 12/12 is the most likely outcome over the next one to two quarters.
Putting all this together is fairly straightforward. If you’re actively participating in European industrial markets, directly or indirectly, it’s time to start carefully examining expenditures in light of a slower-growth to slightly negative environment. You should also consider building up your cash reserves and adopting a conservative and defensive mindset for the remainder of 2019.
