Euro zone industry starts 2026 on weak note, even before energy hit

Euro zone industry takes a hit even before high energy costs bite

Euro Zone Industrial Production and Economic Outlook

FRANKFURT, March 13 (Reuters) - Euro zone industrial production unexpectedly shrunk in January as most of the bloc's biggest countries recorded declines, casting doubt on the sector's long-predicted recovery as surging energy costs will add to the sector's multi-year misery. 

Output in the 21 nations sharing the euro currency dropped by 1.5% on the month, underperforming expectations for 0.6% growth, data from Eurostat showed, as Germany, Italy and Spain all reported contractions.

Compared to a year earlier, output was down 1.2% against expectations for 1.4% growth in a Reuters poll of economists, a figure made worse by the fact that Eurostat revised up its December figure. 

Long-Term Stagnation and Contributing Factors

Euro zone industry has been broadly stagnant for years and its output is now 3% below its 2021 level as high energy costs, stiffening competition from China, U.S. tariffs, poor productivity growth and low global demand for European cars have all hurt the bloc.

Policymakers had hoped that 2026 would be the start of a recovery given years of work to prop up productivity but the January figures, along with this month's surge in commodity prices, suggest that turmoil may continue. 

Expert Commentary on Industrial Outlook

"Manufacturing optimism in the euro zone is fading as industrial production falls to its lowest level since 2024 in January, and the Middle East conflict has renewed output risks, especially for energy-intensive sectors," ING economist Bert Colijn said.

Regional Impacts and Sectoral Analysis

Contraction in Ireland Weighs on Bloc

CONTRACTION IN IRELAND WEIGHS ON BLOC

Energy production surged in January compared to the previous month but both durable and non-durable goods production fell sharply as did the output of intermediate goods.

The euro zone figures were aggravated by a sharp contraction in Ireland, where a large number of multinationals operate for tax reasons, often causing large swings in production figures. 

Germany's Industrial Decline

Still, Germany, the euro zone's biggest country and the bloc's dominant carmaker, took one of the biggest hits and its output is now 9% below its 2021 level, with poor order figures suggesting no near-term respite.

German output has been trending down for years, keeping the overall German economy stagnant for the past three years but a recovery for 2026 is still expected on a government spending spree on defence and infrastructure.

Energy Costs and Geopolitical Risks

That boost may be offset by surging energy costs as oil prices are up around two-thirds since the start of the year and natural gas costs are up around 80% on the U.S.-led war in Iran, a double whammy for industry as it raises costs and saps purchasing power.

"Europe’s industrial sector is highly reliant on imported gas and oil, and is also exposed to supply-chain disruptions resulting from the conflict," Diego Iscaro at S&P Global Market Intelligence said. 

Europe is a net importer of energy and its industry is especially sensitive to commodity price shocks as the bloc has relatively few natural resources.

(Reporting by Balazs Koranyi; Editing by Toby Chopra and Emelia Sithole-Matarise)