Letter IEDI n. 893–From Loss of Dynamism to Contraction: industrial performance by technological intensity
There is no doubt that the third quarter of 2018 did little to help the recovery of the industrial sector. Both GDP data and physical production data show a marked industrial slowdown over the first three quarters of the year. Considering the meager output result of October, released this week, this downward trajectory shows no signs of reversal yet.
The increase in manufacturing GDP went from 5.7% in Q4/17 to only 1.6% in Q3/18. Meanwhile, the general industry's physical output growth rate fell from 5.9% to 1.2% in the same period and reached 1.1% in October. Faced with this loss of momentum, it is not surprising that industrial employment, which had registered a 4.6% advance in the last quarter of 2017, merely achieve stability in July-September/18 compared to the same period of the previous year.
In this Letter IEDI, we will analyze how the different branches of the manufacturing industry, grouped according to their level of technological intensity following the OECD methodology, behaved during this economic process of slowing down until the third quarter of 2018. The sector is divided into four bands: high, medium-high, medium-low and low technological intensity.
The deceleration movement was quite widespread, to a greater or lesser extent, reaching the four identified ranges. The main negative contributions came from the extremes, that is, the high and low intensity groups, as summarized below, while in the medium-low technology industry the slowdown was very marginal.
The high-tech industry, which had registered satisfactory growth in late 2017 (+8.4% in Q4) and early 2018 (+12.2% in Q1), remained virtually stagnant in the third quarter of this year, changing 0.2% only. This result was produced by almost all of its branches. Only pharmaceuticals managed to advance in Jul-Sep/18 (+9.5%).
Office and computing materials, on the other hand, fell by 1%, interrupting a succession of growth rates above 20% in the previous four quarters. On the other hand, radio, TV and communication equipment were the most affected in Jul-Sep/18: -11.3%. Despite these recent unimpressive results, thanks to the performance of the beginning of the year the high technology range registered growth of 4.6% in Jan-Sep/18, well above the 2.8% increase in 2017 as a whole.
As for the low technological intensity industry, its loss of dynamism was more serious, because the range was thrown back into negative ground. Production declined -2.4% in the 2nd quarter/18 and -3.8% in the 3rd quarter/18 compared to the same period of the previous year. Behind this performance are food and beverages (-2.5% and -6.8%, respectively) and textiles, leather and footwear (-5% and -2.8%); that is, branches that are more closely related to employment —which still has much to improve— and to the population's purchasing power —which in 2018 has not received the same help from the inflationary slowdown as seen in 2017.
The picture of low technology is not even more serious because its traditionally exporting branches continue to assure a certain positive dynamism, as is the case of wood, paper and pulp, increasing since the second half of last year. In Q3/18 it grew +4.3%. Despite this, in Jan-Sep/18 the low technology category registered a negative rate again: -1.6%, contrasting with a 2% increase in 2017.
The intermediate technological intensity groups are those that presented more consistent results. The medium-high technology one showed the best result of Q3/18, +7.1%, but nevertheless still recorded some deceleration in relation to the end of last year, when it grew 11.6% (Oct-Dec).
This deceleration came mainly from the auto industry, which, despite still growing well, registered half the rate of the last quarter of 2017: +13.4% in Jul-Sep/18 against +24.2% in Oct-Dec/17. Still, 2018 is going to be a better year (+7.2% for Jan-Sep) than 2017 (+5.8% for Jan-Dec).
Finally, the group of medium-low technological intensity narrowly did not escape the general picture, since it did not show major signs of loss of dynamism. Although the first quarter of 2018 was unfavorable (-0.1%), production grew again in Q3/18, 3.2%, a pace not far from that of Q4/17 (+3.8 %) or Q2/18 (+3.6%). In July-September/18 all its components registered positive rates, notably metal products (+4.9%) and oil and fuel (+3.6%). This category, which was the only one to lose production last year (-0.9% Jan-Dec), now grew 2.3% in 2018 up to September.