Industrial price dive may lead to point of no return

Exchange of signatures between Pierluigi Gilibert, CEO of the European Investment Fund (EIF) on the left, and Daniel Calleja Crespo, Director General of DG Enterprise and Industry of the EC in the presence of Marco Peronaci, Deputy Permanent Representative of Italy to the EC, 1st from the left, and Ferdinando Nelli Feroci, Vice President designate of the EC in charge of Industry and Entrepreneurship 2nd from the right. (EC Audiovisual Services 22/7/2014).

Exchange of signatures between Pierluigi Gilibert, CEO of the European Investment Fund (EIF) on the left, and Daniel Calleja Crespo, Director General of DG Enterprise and Industry of the EC in the presence of Marco Peronaci, Deputy Permanent Representative of Italy to the EC, 1st from the left, and Ferdinando Nelli Feroci, Vice President designate of the EC in charge of Industry and Entrepreneurship 2nd from the right. (EC Audiovisual Services 22/7/2014).

Last Monday, Eurostat, the EU statistical service issued data on June industrial price developments (0.1% month to month), actually showing stagnation in relation to May. It is more alarming to observe though that all along the first five months of 2014, from January to May on a month to month basis, industrial prices had been receding by percentages ranging from -0.1% to -0.3% (January -0.3%, February -0.2%, March -0.2%, April -0.1%, May –0.1%). In reality, industrial producer price monthly rate changes have been oscillating below zero for many months now. This fact seen together with the fall of business investments and the fall of inflation to 0.4% in July, may be precursors of even worse developments in the immediate future. Let’s take one thing at a time.

Cheapening industry

According to a Eurostat Press release, “In June 2014, compared with May 2014, industrial producer prices rose by 0.1% in both the euro area (EA18) and the EU28… In May prices fell by 0.1% in both zones. In June 2014, compared with June 2013, industrial producer prices decreased by 0.8% in both the euro area and the EU28”. Evidently, the monthly falls of industrial prices kept haunting all first half of this year as noted above. Admittedly the falls are rather small, but nevertheless their presence is a worrisome reality. It’s not only that; unfortunately, data on yearly industrial price evolution is much more alarming.

The same source reveals that on a twelve month basis, industrial product prices kept falling at frightening speed. The relevant Eurostat’s Press release is very enlightening. It reveals that in January 2014 industrial good prices in Eurozone compared with the relevant figures of 2013 fell by 1.3%. In February and March, prices retreated by 1.7% each month, in April the plunge was 1.2%, in May 1% and in June losses amounted to 0.8%.

Large yearly losses

A meticulous observer may note that the rate of fall of prices shows a lessening tendency. For one thing, this is not quite certain, because in February and March the drop was much larger than in January. In reality, the declining tendency of the fall is just three months old and cannot constitute an established trend. On top of that, the yearly losses are of the order of entire percentage units, while the monthly rise in June is a mere 0.1%. Indisputably, the established trend of industrial goods price evolution is a distinct descent.

Traditionally industrial goods production constitutes the heart of Eurozone economy, despite the weakening of the manufacturing sector in the Old Continent during the past twenty years. If the long-term tendency of falling production of industrial goods coexists now with a fall of their prices, Eurozone won’t be able to guarantee to its citizens not even the present relegated levels of welfare.

Manufacturing base

Unfortunately, the falling prices of industrial goods is not the only problem that the Eurozone economy currently faces. Business investment also keeps falling. At the end of last month Eurostat issued a relevant Press release. It read like this, “In the first quarter of 2014, the business investment rate1 was 19.3% in the euro area, compared with 19.5% in the fourth quarter of 20133. This fall was the result of investment decreasing (-0.8%) and gross value added increasing (+0.2%). Total stocks (materials, supplies and finished goods) fell for the second quarter in a row”.

Evidently, if a business sector suffers all kinds of damages, in production volumes, price losses and investment insufficiencies its future cannot be rosy at all, to say the least. Eurozone industry may score some victories but this refers to a small number of subsectors. The wins are also geographically limited, as in the German automotive industry or the French sector of nuclear energy.

Historically, manufacturing in Europe has guaranteed not only the wellbeing of its citizens but also in more than one ways it has supported democracy and social cohesion. If the present problems continue for some more time and the unemployed lose faith in a better future, then everything is possible. The European election results of last May, strengthening the extremists and the Eurosceptic forces, may constitute just the prelude of something much more dangerous. Inflation percentages should not anymore be of interest only to economists. All political and social leaders and decision makers have to start thinking hard about that and more precisely in relation to effectively supporting the industrial SMEs by facilitating their financing opportunities.

 

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