Key Takeaways:
- MacroX sees German Industrial Production growth moderating in April after a strong Q1
- Our nowcast leads the flash PMI by 2 weeks and the official German IP number by 2 months!
- Alternative data provides a city level diffusion view of shocks
The ECB raised rates in March in the midst of a financial panic
Turmoil in the banking sector dominated the week of the ECB’s decision in March. A few days before the decision, US authorities declared Silicon Valley Bank insolvent, while the ECB meeting occurred against the backdrop of Credit Suisse shares plummeting due to a rapid loss of confidence in its business model. Regardless of this, the ECB hiked rates by 50bps to 3.5%. This hike immediately drew comparisons to their decision to raise rates in 2011 despite Christine Lagarde’s insistence that the central bank had learned from past mistakes. Given this, the ECB will be desperately looking for signs of weakness in the real economy.
German Manufacturing: PMI and official data have diverged in 2023
An economic sector key to the prospects of the Eurozone economy is German manufacturing. Reassuringly for the ECB, official data for German industrial production has been relatively strong in 2023. However, the ECB will only have seen data until February due to the delay in publishing it! On the other hand, the survey-based flash PMI is more up-to-date as it is released towards the end of every month. Furthermore, it has diverged from the official measure this year showing 3 straight months of contraction culminating in its lowest print for three years in March. This deviation between the official and survey measure of activity complicates the view of the sector that both policymakers and investors have.
MacroX Nowcast is a real-time view of activity in the sector
The MacroX Nowcast for German manufacturing can provide clarity. It uses many alternative data sources (including satellite, news, sensor, and social data) as inputs to a cutting-edge AI model to generate a real-time picture of the sector. Furthermore, since the nowcast is real-time, we have insights into the manufacturing sector for April! Our Nowcast shows industrial production expanding in Q1, blending with the official data. However, activity has moderated somewhat this month and the impulse is currently more neutral. With the impact of the ECB rate hikes still filtering through the economy, this impulse could easily turn negative shortly.
Figure 1: MacroX Nowcast, the PMI and German IP (all Z-scored)
Available at the City Level!
The granularity provided by alternative data allows a deeper analysis than a simple aggregated survey measure such as the PMI. At MacroX, we can nowcast activity at the city level, which deepens our understanding of the macroeconomy and allows us to see how concentrated or diffuse shocks are. The chart below shows activity across 55 major German cities for the past five years. For an example of a concentrated shock, look at Dec 2020/Jan 2021 where we see a coordinated downturn across cities. Currently, however, activity across cities is relatively uncorrelated as certain cities are expanding and others contracting. Feel free to play with the chart below to see manufacturing activity in an individual or combination of cities!
Figure 2: MacroX Nowcasts at the city level (all Z-scored)
Outlook for the ECB
The latest German inflation data indicating that prices rose 1.1% in March will have been uncomfortable reading for the ECB. Weakening economic activity, in the face of such sticky inflation, will only make their job more difficult. MacroX’s measure of German activity should give the ECB some comfort that the real economy is proving reasonably resilient despite the negative shocks that occurred in March. How long this continues is uncertain, but what is certain is that MacroX will see any downturn before anyone else.