Category Archives: industrial production

10/6/16: Italian Industrial Production: 2007-2013

Staying with the earlier theme of industrial / manufacturing sector trends, here is a paper from the Banca d’Italia, authored by Andrea Locatelli, Libero Monteforte, and Giordano Zevi, titled “Heterogeneous Fall in Productive Capacity in Italian Industry During the 2008-13 Double-Dip Recession” (January 21, 2016, Bank of Italy Occasional Paper No. 303: looks at the two periods of shocks, separated by one period of brief recovery.

Per authors, “between 2008 and 2013 productive capacity was considerably downsized in the Italian manufacturing sector” based on micro data from the Bank of Italy surveys across “the whole 2008-13 period and in four sub-periods (pre-crisis 2001-07, first phase of the crisis 2008-09, recovery 2010-11, and second crisis 2012-13).”

The study main findings are:
i) “losses of productive capacity varied widely across manufacturing sub-sectors with differences in pre-crisis trends tending to persist in a few sub-sectors during the double-dip recession”;
ii) “large firms were more successful in avoiding major capacity losses, especially in the first phase of the crisis”;
iii) “the share of sales on foreign markets was negatively correlated with performance in 2008-09, but the correlation turned positive in 2012-13”;
iv) “among the Italian macro-regions, the Centre weathered the long recession better” (see charts below);
v) “subsidiaries underperformed firms not belonging to any group”; and
vi) “the negative effects on productive capacity of credit constraints, which discouraged investments, were felt by Italian firms particularly in 2012-13”.

Very interesting outrun by region, presented here in two charts:

Some beef on that point: “The decline in [productive capacity] was not evenly distributed across the Italian macro-regions. The macro-regions more exposed to foreign demand were severely hit by the global financial crisis, with [productive capacity] declining by 8.6% in the North West and 7.0% in the North East.” Now, here’s the irony: Italy was (barely) able to sustain long-term Government borrowing on foot of its extremely strong exporters. During the recent twin crises, this very strength of the Italian economy turned against it. Which sort of raises few eyebrows: strong exporting capacity of Italy led the country to experience sharper shock than in many other states. Yet, the core prescription for growth from across the EU members states is - export!; and core prescription for recovery from the status quo main stream economists is - beef up current ace t surpluses (aka, raise exports relative to imports). Italian evidence does not really sound that supportive of these two ‘solutions’…

“During the temporary recovery, the South under-performed the rest of the country, losing 4.0% of its [productive capacity], while [productive capacity] stagnated in the other macro-regions.”

“The sovereign debt crisis affected the entire country more evenly. As a result, between 2010 and 2013 the loss of [productive capacity] in the South (-8.0%) was roughly twice as large as that recorded in the rest of the country (-4.7%)… The gap reflects the within-country heterogeneity in firms’ characteristics : …South Italy has mainly small firms, with an average of 100 employees (roughly constant during the double-dip crisis). Average firm size is larger in the Centre, just below 150, and in the North East, around 180, and even more so in the North West (consistently above 200). …southern regions have smaller export shares (about 20%), which are higher everywhere else (around 35% at the beginning of the sample); the export share shows a positive trend in all macro-regions.” You can see these reflected in the charts above.

In summary, thus, “the degree of foreign exposure helps to explain why the North suffered more during the global financial crisis. Also, the continuing decline of [productive capacity] in the South since 2007 is consistent with the smaller firm size in that macro-area (discussed above) and the larger decline of domestic demand there”.

So the key lesson here is: in the current environment characterised by rising regionalisation of trade flows and weak global demand, the exports-led recovery is more likely to trigger a negative shock to the economy than support economic growth.

Unless you are talking about a country like Ireland, where exports are booming despite global demand slowdown. Which, of course, cannot be explained by anything other than beggar-thy-neighbour tax optimisation policies.

10/6/16: Wither Manufacturing? Evidence from Denmark

Couple of posts relating to most current research on the recovery and longer term prospects in global manufacturing. As usual here, we shall focus on the advanced economies.

A recent NBER paper, by Andrew Bernard, Valerie Smeets, and Frederic Warzynski, titled “Rethinking Deindustrialization” (March 2016, NBER Working Paper No. w22114: looked at decline in manufacturing activity in Denmark, showing that “manufacturing employment and the number of firms have been shrinking as a share of the total and in absolute levels.” The authors examine this phenomena over the period of 1994 to 2007.

“While most of the decline can be attributed to firm exit and reduced employment at surviving manufacturers, we document that a non-negligible portion is due to firms switching industries, from manufacturing to services.”

Here is an interesting list of related findings based on looking closer at the “last group of firms before, during, and after their sector switch”:

  • “Overall this is a group of small, highly productive, import intensive firms that grow rapidly in terms of value-added and sales after they switch.”
  • “By 2007, employment at these former manufacturers equals 8.7 percent of manufacturing employment, accounting for half the decline in manufacturing employment.”
  • “…we identify two types of switchers: one group resembles traditional wholesalers and another group that retains and expands their R&D and technical capabilities.”

Net result? Quite surprising conclusion that the “findings emphasize that the focus on employment at manufacturing firms overstates the loss in manufacturing-related capabilities that are actually retained in many firms that switch industries.”

16/6/15: Indigenous Sectors and Exports: Ireland’s Conundrum

In response to my comment on Irish exports of goods data through April, one analyst suggested that things are not as bleak, citing expansion of industrial production in Traditional sectors as a sign of real economy improvements (as opposed to accounting economy of our MNCs-led tax optimisation exports).

No doubt, the comment is correct. Things are not so bleak as Traditional sectors shrinking. In fact, they have been growing and with them, there has been some growth in indigenous exports too.

Here is the latest quarterly data on industrial production separating Modern sectors (MNCs-dominated) and Traditional sectors (which also include a large segment of MNCs, for example in food and beverages).

Yes, Traditional sectors have expanded. Which is good news. But they expanded at a rate of 20.4% over 12 quarters, while tax optimising Modern sectors expanded at a rate of 78.6% over 8 quarters. Good news is not too great, it turns out.

But what about more recent data? I prefer quarterly series for they provide a bit less short run volatility. But as you might ask, here are comparatives:

  • In Q1 2015, Modern Sectors output by volume rose 39.4% y/y while Traditional Sectors output rose 10.1% y/y. That's almost 4 times slower rate of growth for the Traditional Sectors.
  • In April 2015, Modern Sectors output rose more reasonable 7% y/y (and shrunk 1.1% m/m), while Traditional Sectors output rose 11.3% y/y (and grew 4.7% m/m). That made April 2015 the first month since December 2014 that this happened.
  • But what exactly did happen in April to drive Traditional Sectors output up faster than Modern Sectors output? Modern sector includes the following industrial sectors: NACE 20.00 - 21.20 Chemicals and pharmaceuticals: up only 7% in April y/y,  NACE 26.00 - 27.90 Computer, electronic, optical and electrical equipment was up 44.8% in April y/y; NACE 18.20 Reproduction of recorded media up 34.8% y/y in April y/y; and NACE 32.50 Medical and dental instruments and supplies which goes into "Machinery and equipment, not elsewhere classified" reporting line - up 54.8% y/y. So I am slightly puzzled how did Modern Sector manage to post 7% growth when all components of the sector are growing at 7% or higher. The answer is, of course, in the CSO not fully reporting exact components of what is included in the Modern Sectors. 
  • On Traditional Sectors side, the biggest gaining sub-sector was "Other Food Products" at 13.2% y/y. Which means that the fastest growing Traditional sub-sector was growing slower than all but one Modern Sector sub-sectors. 
Let's set aside monthly figures, and focus on less volatile quarterly production to recap: in 1Q 2015: there is some growth in the Traditional sectors, but that growth is vastly below the 'miracle' growth recorded in Modern sectors...

7/5/15: The Surreal Industrial Production in Ireland: Q1 2015

Irish Industrial production figures for Q1 2015 are confirming what has become a serious joke for many analysts: Irish growth figures are now so distorted by various multinational tax optimisation tricks, there is little point looking at much of the GDP and GNP growth coming from the official accounts.

Take a look at comparatives for seasonally-adjusted indices of volume of production across 'Modern' and 'Traditional' sectors:

Year-on-year, Q1 2015 volumes of production rose 31.73% across all Industries. In the Traditional sectors, production increased 13.1%, while in Modern sector production rose 48.7%. Guess which sector is dominated by the MNCs?

Now, take a look relative to crisis period trough:

  • Across industries, since the bottom was hit in the crisis period (in 1Q 2013), production rose 47.3% - implying quarterly rate of growth of 4.96%. 
  • Across Traditional sectors, output rose 20.42%, implying quarterly growth rate of 1.56%; and
  • Across Modern sectors output rose 78.613%, implying quarterly rate of growth of 7.52%.

Guess why is one sector growing at a rate that is almost 5 times the rate of growth in another sector? It can't be due to 'most productive labour force' we allegedly have, for both Traditional and Modern sectors have access to the same labour force. It can't be due to our 'pro-business institutions and culture', for both sectors have equal access to these, presumably. It can't be due to our 'Knowledge Economy', for - setting aside the questionable nature of its existence - both sectors can rely on knowledge in the economy equally. Wait… perhaps it is down to the difference between MNCs ability to access tax optimisation schemes which are down to international accounting methods, whilst traditional sectors firms have to pay the going headline rate of tax on their real activities? For that is, pretty much, the only fundamental long term difference between the two sectors.

But let's drill a little deeper. See the following chart:

What the above shows is the source of growth in the Modern Sectors - aka Chemicals and Pharmaceuticals - a sector that has managed to post growth of 109.2% on trough (from 1Q 2013). Yep, year on year the sector has expanded output by 60.76%. You'd have to wonder - what on earth can propel pharma to these rates of growth? The answer is the 'miracle' of contract manufacturing - a scheme whereby something not produced in Ireland, gets booked as if it was produced in Ireland.

This we call growth. To the amazement of the European politicians and the amusement of the more shrewd investment markets analysts who are starting to laugh at our PMIs, our GDP, our GNP... and so on...