Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / How Spain Outperforms Germany in Eurozone Factory Output
Transcript
- Lucas: The latest factory output numbers across the Eurozone have been landing over the past two weeks, and they tell a story that's hard to ignore: Spain is pulling away from Germany. Luna: The divergence we've been tracking for a while seems to be accelerating. What do the latest reads show? Lucas: So, industrial production for Spain came in at plus 3.2 percent year-over-year for May. That's ahead of consensus. Meanwhile, Germany printed negative 0.8 percent. That's not a one-month blip — it's been six months now of Germany contracting or barely flat, while Spain has been positive in four of the last five months. Luna: Three percentage points of spread is massive inside a currency union. And it's not just Spain — Italy and Portugal are also outperforming Germany, though not by as much. Lucas: Exactly. If you look at the country-level ETFs, the iShares MSCI Spain ETF — ticker e w p — is actually up 0.3 percent over the past five days. That's in a week where the broad European ETFs like Vanguard FTSE Europe, V-G-K, are down almost 2 percent. So Spain is bucking the trend. Luna: And Germany's ETF, e w g, is down 1.9 percent in the same period. So the market is pricing in this divergence already. Lucas: Right. And the question is: is this structural or just cyclical? I think there's a strong argument that it's structural. Spain has been aggressively reshoring manufacturing, especially in automotive and renewable energy components. Germany, on the other hand, is still heavily reliant on exports to China, and that demand is softening. Luna: The China factor is huge. Germany's export exposure to China is around 7 percent of GDP, versus Spain's roughly 2 percent. So when Chinese demand slows, Germany feels it directly. Lucas: And then there's energy. German industry never fully recovered from the 2022 energy price shock. Industrial production is still about 5 percent below pre-pandemic trend. Spain, by contrast, invested heavily in renewables and now has some of the lowest wholesale electricity prices in the Eurozone. Luna: That's a real competitive advantage. If you're a manufacturer deciding where to locate a new plant, lower energy costs plus a growing domestic market — Spain's economy is growing at over 2 percent — that's attractive. Lucas: And it shows up in the trade data too. Spain's goods trade surplus has been widening, while Germany's surplus has been shrinking. The Eurozone aggregate surplus is still positive, but the composition is shifting south. Luna: So what does this mean for ECB policy? The hawks in the Governing Council — mostly from the core — keep arguing for caution on rate cuts because of services inflation. But if the periphery is growing faster and generating more employment, does that give the ECB more room to ease? Lucas: It's a tension. The ECB has one policy rate for the whole bloc, but the economies are moving at different speeds. If you cut rates to help Germany, you risk overheating Spain. If you hold rates steady to contain Spanish inflation, you deepen Germany's industrial slump. Luna: And the market seems to be betting that the ECB will eventually have to prioritise the larger economy. German GDP is still about 25 percent of Eurozone GDP, so its slowdown pulls the whole region down. Lucas: But that's a short-term view. Look at the bond markets: Spanish 10-year yields are about 125 basis points above German bunds. That spread has actually narrowed this year, which suggests investors are becoming more comfortable with Spanish risk. They see the structural improvement. Luna: That's a really important point. The market is rewarding Spain for its reforms and investment. Remember, Spain ran a primary budget surplus last year — something Germany hasn't done in years. Lucas: Exactly. So if you're an investor looking at Europe, the old assumption that Germany is always the safe bet and the periphery is always the risk might need updating. The data is clearly pointing the other way right now. Luna: Which sectors are driving Spain's outperformance? I know automotive is big, but what else? Lucas: Automotive is still the largest manufacturing sector, about 10 percent of GDP. But the big growth area is renewable energy equipment — solar panels, wind turbine components, battery storage. Spain has attracted a lot of foreign direct investment from companies diversifying supply chains out of Asia. Luna: That 'reshoring to near-shore' trend is real. And it's not just Spain — Portugal and Greece are also seeing inflows. But Spain is the biggest beneficiary because of its size and infrastructure. Lucas: And labour costs. Unit labour costs in Spain have risen more slowly than in Germany over the past three years. That's partly because Spain still has higher unemployment, so wage pressure is less intense. Luna: That's a double-edged sword though. Low wage growth helps competitiveness but hurts domestic demand. Spain's consumption has been okay but not as strong as the investment numbers. Lucas: True. But on net, the manufacturing revival is creating jobs and improving the trade balance. The question is whether Germany can adapt. Some German companies are already moving production to Spain — Volkswagen has expanded its Pamplona plant, for example. Luna: So we might be seeing a rebalancing within the Eurozone that the ECB has wanted for years, just not in the way they expected. Lucas: Yeah, the old narrative was that Germany would drive exports and the periphery would consume. Now it's the periphery that's exporting more, and Germany is struggling to compete. That's a real shift. Luna: And if you look at the trade-weighted euro, it's been strong — the dollar index is at 120.4, but the euro has weakened a bit to 1.15 dollars. A weaker euro helps exporters, but Germany hasn't benefited as much as you'd expect. That suggests the problem isn't just currency. Lucas: Right. It's structural. Germany's industrial model relied on cheap Russian gas and strong Chinese demand. Both of those are gone. Spain's model is more diversified and more aligned with the energy transition. Luna: This kind of deep dive into what's actually happening in the real economy is exactly why listeners tell us they value the show. It's ad-free and independent because listeners chip in to keep it that way. If you've found these insights useful, you can support us at buy me a coffee dot com slash fexingo. No pressure, just helps us keep doing this. Lucas: And it really does make a difference. Every contribution means we can spend more time digging into the data instead of chasing sponsors. Now, back to the factory floor — what should investors watch in the second half of 2026? Luna: I think the key indicator is the German IFO business climate index due next week. If that drops further, it could force the ECB's hand. But also watch Spanish PMI data — if that stays above 55, it confirms the trend. Lucas: And the other thing is the auto tariff situation. If the US imposes tariffs on European cars, that hits Germany hardest. Spain's auto exports are more focused on the European market, so they're less exposed. Luna: So it's not just a story of two economies; it's a story of two different economic models colliding inside the same currency union. And the model that's adapting faster is winning right now. Lucas: Exactly. And that's the kind of shift that can persist for years. The data is telling us something important — it's worth paying attention.