Industrial Activity Likely Underestimated By IP Data (1/2)

Industrial production and industrial gross value added have diverged in Germany, possibly for over a decade. The Ministry of Finance gives some color on this in their monthly report and concludes that German industrial conditions are likely being underestimated by IP data.

MoF notes four main potential explanations:

• Reshoring of production. This reduces the input ratio of goods production (i.e the price-adjusted share of externally sourced purchased intermediate inputs as a proportion of production value), which assuming constant production, would raise gross value added.
• A shift towards products with a lower input ratio altogether, for example R&D as opposed to final production (the "workbench").
• A shift towards higher-margin products. This would imply production in volume terms developing weaker than revenue and GVA.
• Different subcategories weightings. IP weightings are updated only every 5 years, which can keep expanding areas underrepresented and overestimate the remaining influence of weaker performing areas. Furthermore, there are some different definitions and samples involved across the two measurements.