The worst production data since the Great Recession (Daily analysis 13.02.2019)

Industrial production in the eurozone incurred the biggest fall in less than a decade. Prime Minister Theresa May wants to force Parliament to reach an agreement with the EU, but only at the last possible moment. The zloty remains weak. The afternoon data on Poland's current account will be important - it could be the worst in years.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 2:00 p.m.: Current account balance for Poland. Data for December 2018 (estimates: deficit at the level of 960 million EUR).
• 2:30 p.m.: CPI inflation from the USA for January (estimates: 0.1 month-on-month and 1.5 year-on-year, excluding food and fuel: 0.2% month-on-month and 2.1% year on year).

Abrupt decline in industrial production

After very weak industrial production data from the individual eurozone economies, we could have expected to have the worst data in years for the whole region. It turned out that production in the eurozone fell by 4.2% year-on-year in December, which was the worst reading in 9 years, i.e. since the great recession at the end of the last decade.

But against all the odds, data from the eurozone is not equally comparable. The countries which have been recording production falls practically every month since the last six months are the most worrying. Unfortunately, they include two of the three largest economies of the Community - Italy and Germany.

Data from, e.g. Ireland, where the decrease amounted to almost 20% year-on-year in December, may be less worrying. However, readings from this country are usually very volatile, and significant decreases, e.g. in food production, are the result of one-off disruptions rather than a worse economic situation, to which food is usually relatively resistant.

Data from Denmark, which is not part of the eurozone but has a currency that is constantly linked to the European currency and local monetary policy, imitates the ECB's actions. This may also be interesting. While production in the eurozone as a whole has been falling most in almost a decade, the readings from Denmark showed an increase of 14.3% year-on-year, and in the case of manufacturing, it was 16.7% year-on-year, the best reading for at least 25 years. Looking more deeply into the data, it is worth noting that the production of the pharmaceutical industry increased by more than 40% year-on-year, compared to December 2017, which of course is impossible to maintain in the long term. Estimates from Ireland or Denmark show that it is worthwhile to approach some publications with great distance.

Investors also approached the general readings with distance and the euro did not weaken much to the dollar. Aggregate data from the eurozone is usually already known to the broader market, and it is clear that the end of the year was disappointing. The question is when will the rebound take place. Taking into account strong declines in capital goods or intermediate goods, the weak situation may persist over the coming months. However, if the uncertainties related to China (Beijing's customs dispute with Washington) are reduced and the Brexit issue is resolved in a way that will not disrupt economic activity, then the rebound can take place relatively quickly, even taking into account the difficult political situation in the European Union (uncertainty before the EP elections at the end of May). As a result, the euro may be under pressure, although the falls in the EUR/USD are not expected to deepen.

May's strategy. Crucial data from Poland

The British media (firstly reported by ITV) reported that Prime Minister Theresa May will want to play va banque on Brexit. British Conservatives will want to wait until March 21st (EU summit) to try to renegotiate the backstop in such a way that it is also acceptable to the House of Commons, in an atmosphere of greater tension and the risk of a chaotic exit from the EU.

This may resemble the drama regarding the negotiations on Greek debt a few years ago, but in the end, there is indeed a good chance of reaching an agreement. As a result, the pound may still be relatively strong, if Prime Minister May's strategy is not met with a British government opposition (including the Euro-enthusiastic conservatives) and reluctance towards such a strategy from the EU.

Data from Poland

The zloty remains weak and the euro moves in the range of 4.32-4.33 PLN. Although data from Poland is much better than from the common currency area, it is worth noting today's current account readings published by the NBP.

According to Monday's GUS reading, Poland's trade in goods could only reach a deficit of 2 billion EUR in December alone (due to the weakness of exports). If this data was confirmed, the C/A deficit in December could also amount to about 2 billion EUR, i.e. the highest deficit in over 4 years. If the expected January surplus does not balance out the December deficit, we may start to fear that Poland's competitive position in foreign trade will deteriorate, which will not be conducive of a good condition of the zloty.