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SpaceKnow Nowcasting Newsletter (SNN) #10

European Industry – Resilience amid energy crisis?

Italian manufacturing remains weak while SpaceKnow data shows a small rebound in German construction activity.

As winter arrives and fears of a recession increase, questions are being asked about the future of the European economy and its energy-dependent manufacturing. Our Italian manufacturing index dropped sharply in 2022 (Figure 1).

Figure 1: SpaceKnow Manufacturing SAI Index for Italy (trend-cycle component) against the S&P Global Italy Manufacturing PMI (Trading Economics, S&P Global, SpaceKnow)

The manufacturing sector is the backbone for Italy and the continent's economic powerhouse, Germany. The surrounding areas of Central and Eastern Europe are equally important and they provide an important source of cheap labor. The manufacturing sector is significantly affected by high prices in the energy market. Since the Russian invasion of Ukraine began, the market has experienced high volatility. Moreover, a grim outlook for European industry has recently been reported. EU companies in energy-intensive industries such as chemicals, steel, cement, and glass are considering relocating because of unprecedented energy prices.

Recent reports on the European Purchasing Managers' Index (PMI) have sparked new discussions about a possible recession. The fall in the Eurozone's PMI has been accompanied by similar falls in individual countries' indices for all sectors of the economy. It was manufacturing, however, that fell the most. The German economy seems to be hit especially hard relative to other EU's major economies.

SpaceKnow tracks locations from several different sectors to create indices. We also aggregate these locations to map the entire economy's output. These Aggregated indices include key sectors of the economy such as manufacturing, heavy industry, construction or transportation - energy-hungry industries. Just take a look at the Italy index in Figure 1.

Figure 2: SpaceKnow Industrial SAI Index for Germany against the S&P Global Germany Construction PMI (Trading Economics, S&P Global, SpaceKnow)

The figures above show Spaceknow Indices for two key countries in the EU. The first is Italy - an economy troubled by long-term economic stagnation and fragile public finances that can threaten the stability of the Eurozone. Nevertheless, Italy is one of the ten biggest industrial economies in the world. The other index captures Germany, the economic and industrial powerhouse of the block.

The SpaceKnow Manufacturing Satellite Activity Index for Italy in Figure 1 correlates with the Manufacturing PMI. It also shows a slump in the country's manufacturing activity since early 2022, a clear sign of the troubles bothering the country's economy, such as inflationary pressures, energy prices and uncertainty affecting the new orders. GDP growth forecast for 2022 remains solid, as real economic growth even exceeded expectations due to the service sector. The manufacturing PMI shows only a minimal uptick, very much in line with our index.

Figure 2 shows that Germany's Industrial Production Satellite Activity Index correlates well with the PMI construction index. This can be explained by the presence of the cement and construction industries in the index. Looking at the development of the index in 2022, we see a decline after the peak at the start of the year, in line with the PMI performance. Recently, however, the SpaceKnow index has started rising again, followed by an improvement in the PMI. This may point to a surprisingly good performance of the German economy in the last quarter. The index is most likely capturing the positive effect of the recent gas price decline - which fell below 100 EUR per megawatt-hour after reaching record highs at the end of August, due to warmer-than-expected temperatures.

SpaceKnow provides satellite activity data. We research and monitor hundreds of thousands of locations, spanning different industries, to create the world's most comprehensive activity datasets, allowing us to see an unbiased and near-real-time view of current levels of activity, inflection points, and trends for countries, companies, and commodities. Our customers include investors, traders, corporate strategists, economists, and governments.