Eurozone Industrial Production Picks Up

Industrial Production data has just been released for the Eurozone for the month of April. The headline year on year number is showing at 1.4% on a week day adjusted basis, this represents a rise over the March contraction of -0.1% and tops the 0.9% growth expected by market consensus. The seasonally adjusted month on month number is now 0.8%, better than the fall of -0.3% in April and again beating the consensus estimate for a 0.4% growth reading on the month.

The Industrial Production up tick is welcome, manufacturing is one of the key drivers of this fragile recovery for the Eurozone so when it falters the authorities take note. The European Central Bank (ECB) could not deny the recent weak production numbers out of Germany and other large member states, and when these are coupled with the persistent lack of price growth across the entire Eurozone the situation demands action.

Last week the ECB finally moved from it’s wait and see approach and took definitive action towards injecting some stimulus into the faltering Eurozone economy. Some would argue this occurred due to the inflation readings falling rather than rising as the Bank had hoped. Others would suggest that it was the unexpectedly low Manufacturing Purchasing Managers Index out of Germany that not only set off alarm bells but in doing so freed the ECB from German pressure to maintain the status quo.

Regardless for the reasons behind the ECB move it is becoming clear that it’s actions represent only a token gesture and any stimulus derived will most likely come from the signals sent out by the change in stance of the Bank rather than from any direct impact this moderate loosening of monetary policy may produce. In fact there is a empirical evidence, from a Danish attempt at negative rates in the past, which suggests that by taking the Overnight Rate into minus territory the impact on banks reserves and therefore liquidity could be contractionary.