Denial time is over. The eurozone is in recession.

Eurostat reports Eurozone Industrial production Down 0.9 Percent.

The lead chart is from Eurointelligence which comments:

Eurostat's industrial production data for December, released yesterday, confirm what we suspected from last week's poor data from Germany and Spain, which is that the slowdown in eurozone industrial production intensified towards the end of last year. But the Eurostat data tell us more. The slowdown now extends to most countries, including the Netherlands among the largest eurozone member states. Only for the Baltic states and their neighbour Finland, and for Slovakia and Greece, doesn't the index of industrial production for December 2018 register a drop from a year earlier. The drop in industrial production is most dramatic for Italy and Spain among the larger eurozone member states. Ireland has dismal figures but its series is particularly noisy.

Nobody is yet ready to call it a recession.


While we understand why the ECB is reluctant to call a recession, we're about ready to come off the fence ourselves. We don't think we're over-reacting to a single piece of data if we point out that the slowdown in industrial production is broad-based, sectorally and geographically, and has been going on for a number of months, and that it goes along with a number of other negative data we have been tracking also for months now. It may be early days in 2019, but the eurozone economy essentially peaked in the first quarter of last year. That said, domestic consumption and investment do seem to be holding up - but that will be true until it isn't.

The slowdown is mostly due to exports, not domestic consumption, and it hasn't yet filtered down to investment though that cannot be too far off when industrial production is taking a dive. When it does it may be too late, as investment data is somewhat delayed and monetary policy takes some time to take effect. And that is even when the central bank is able to kick-start investment and consumption with a credit supply shock. But currently the ECB's refinancing rate is at zero and the risk-free rates and bond benchmarks are below zero, anchored to the ECB's deposit rate of -0.4%. There is ample liquidity in the financial system as a result of the ECB's asset holdings of over €2tn. And the bank lending survey shows that the supply of credit is unimpeded. There is not a lot monetary policy can do to respond to sagging demand under these conditions.

Key Point

There is not a lot monetary policy can do to respond to sagging demand under these conditions.

Mike "Mish" Shedlock

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