Societe Generale economists note Euro area industrial production fell sharply in January despite improving PMIs and German orders. Pharmaceuticals and energy‑intensive industries drove the decline, but the economists still foresee a cyclical recovery supported by German fiscal stimulus, AI‑related capex, housing and consumption, with industrial output expected to realign with domestic demand over time.

Sector divergences mask cyclical recovery

"After a modest recovery in 2H25, the industrial sector weakened sharply in January (‑1.5% mom). We expected the autumn rebound to lose momentum, but not such a significant drop. This is somewhat at odds with the early‑year improvement in the euro area manufacturing PMI and the encouraging news on German new orders. Two sectors explain most of the January decline."

"Pharmaceuticals: The sector, which had supported industrial output until the summer—mainly due to higher exports to the US around “Liberation Day”—has been declining despite strong demand for weight‑loss drugs. The January drop was particularly steep (‑16% mom), bringing production to its lowest level since mid‑2024 and accounting for two‑thirds of the fall in aggregate industrial output. A significant rebound in February appears likely."

"Energy‑intensive industries: Production fell 3.4% m/m, reaching a new record low since 2009—about 13% below pre‑Ukraine‑war levels. These industries continue to operate under challenging conditions, compounded by recent volatility in oil and LNG markets linked to the conflict in Iran. This sector is likely to remain a medium‑term drag on aggregate industrial output."

"Looking ahead, our outlook still points to a cyclical recovery in the euro area, supported by the German fiscal stimulus plan, AI‑driven capex, the housing recovery and resilient consumption. Meanwhile, the impact of US tariffs now seems largely absorbed."

"We hence expect industrial production to realign with the ongoing rebound in domestic demand, though with clear divergence across sectors."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)