Eurozone factories suffer biggest output fall since pandemic hit

Industrial groups in the euro area suffered their biggest monthly fall in production for more than two years in July, underlining the impact of surging energy prices and supply chain bottlenecks on the region’s growth prospects.

Factory output in the 19 countries that share the euro dropped 2.3 per cent in July from the previous month, its biggest fall since April 2020, Eurostat, the European Commission’s statistics office, said on Wednesday. It was a larger decline than the 1 per cent decrease expected by economists polled by Reuters, and was party explained by a sharp drop in Ireland.

Economists expect the higher cost of power to continue to hit manufacturing, and consumer spending, in the coming months. “Further contractions in industry are on the horizon,” said Rory Fennessy, an economist at Oxford Economics, adding that companies would be “forced to cut back production even if hard rationing is to be avoided”.

Many economists, including Fennessy, believe the region’s economy will contract in the third quarter and not grow again until the opening months of 2023.

While monthly production fell in Germany, France and Spain, the decline in the eurozone figures was exacerbated by a plunge in Irish output. Excluding Ireland, industrial output in the bloc fell about 0.6 per cent.

“There’s a trend here — Irish data is becoming so volatile, it’s increasingly affecting eurozone aggregate numbers,” said Conall Mac Coille, chief economist at stockbrokers Davy in Dublin. “We’re seeing moves of this order all the time and they seem to be getting worse.”

The biggest drop for the eurozone was in the production of capital goods, such as buildings, machinery and vehicles. But production of durable consumer goods, such as laptops and jewellery, and intermediate goods including steel and wheat also fell. 

The decline would have been bigger without increases in the production of energy and non-durable consumer goods, such as clothes and food. “Energy-intensive industries in particular are struggling more than most, with output almost 4 per cent lower than at the start of the year,” said Jessica Hinds, an economist at Capital Economics. 

Some of Europe’s biggest energy users, from steel to chemical companies, are cutting back on production, and business leaders are warning that soaring prices risk eroding the region’s competitiveness.

On Wednesday, VCI, the German chemicals and pharmaceutical industry association, forecast its production would fall 5.5 per cent this year due to the high cost of energy and raw materials. But it said revenues in the sector had so far proved resilient, rising 21.6 per cent year-on-year in the second quarter thanks to a 24 per cent surge in factory gate prices.

The July decrease in eurozone industrial output ended three consecutive months of growth and meant it was 2.4 per cent lower than 12 months earlier. The level of output is now below pre-pandemic levels.

Ireland’s 18.9 per cent drop was due to the often lumpy export activity of the multinational pharmaceutical groups that base their EU operations in the country.

“We believe that this number for Ireland is more related to the pharmaceutical sector, which is driven by the export decisions of a relatively small number of very large firms based here,” said Dermot O’Leary, chief economist at the Dublin-based stockbrokers Goodbody.

Irish industrial production has often been volatile from one month to the next. A 14.5 per cent decline in April was followed by growth of 19.5 per cent in May and 11.2 per cent in June.