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Industrial Production Awaiting A Synchronized Bottom

Written by A Forex View From Afar on Sunday, January 18, 2009

According to the latest reports coming out of the major economies, industrial production took a deep plunge recently. As observed in the attached chart, Japan seems to be the most affected until now, while the U.K. production seems to be in the worst shape.

The slump seen in the industrial production has multiple effects in the economy. Firstly, and mostly, it denotes that businesses have cut back on spending, something not good for the economy, especially at this time. Secondly, many producers will start to cut costs as much as they can. More often than not, the work labor represents the biggest fixed expenditure for most businesses because it does not matter if the employees work or not, but they would still need to get a (minimal) wage.

The strong declines in production output were very well seen in the PMI releases, which currently are at record low levels for the four economies. To some extent the downtrend observed in exports and imports also point to declining production since it denotes the demand side is shrinking.

Since 2002 U.K. had the weakest growth as a result from not being able to add any new value to the economy, while Japan had the strongest growth in industrial production, approximately 25%. Japan also had the biggest contraction in the industrial output during the 2001 recession and during the current one. Only in the last year, Japanese industrial production dropped 15%. Industrial production in the Euro-area and in the U.S. managed to grow side by side since 2002, both recording an approximate 15% expansion in output.

Industrial Production Awaiting A Synchronized Bottom

In addition, the industrial production chart shows one very important feature. During the 2001 recession, industrial production bottomed at the same time, in three out of the four economies: in Euro-area, U.S. and Japan. This is very important to pay attention to because it likely indicates that it will most happen again whenever industrial activity finds a bottom again.

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