Microeconomic Indicator in FOREX:
What is Industrial Production?
Central banks around the world release a report on the country’s total production of raw goods produced by industries like factories, mines, and electric utilities. The raw goods include manufacturing, mining, and gas, etc. These raw goods produced inside the country is known as industrial production. The changes in the production of these can explain the changes in the structure of that country’s economy. Industrial production also includes the printing businesses of newspaper, book publishing, etc. This data is released on a monthly basis by central banks to understand the price changes in the raw goods produced.
A lot of importance is given to this data by the governments because it can be the starting point of inflation. If there is an increase in the prices of raw materials produced, it will eventually lead to a rise in prices of the end goods down the line and can cause inflation. The industrial production data is generally combined with a lot of other industry estimates to calculate the capacity utilisation ratios for each business line. These utilisation ratios are provided for sectors like total manufacturing and total electronic productions, etc.
What does the Industrial Production measure?
Industrial production basically measures the total output of the entire industrial sector. This generally covers the mining & gas industry, manufacturing of various goods, general utilities and also construction. This data acts typically as an indicator and usually expressed as an index. The variation in the industrial production is represented in percentage which reflects the change in the size & volume of industrial output compared to the previous years. This changes in the rates of Industrial output can have a direct impact on economic health.
Industrial production data can frequently move the forex markets as it is considered as one of the essential indicators in forecasting inflation. The changes in the volumes industrial production and capacity utilisation can be used in predicting future economic activity.
Reliable sources of information on ‘Industrial Production’ for Major currencies:
There is a lot of information with respect to the Industrial Production of different countries in the sources provided below. You can familiarise yourself with the Industrial Production of the respective country along with the historical data related to that. You can also compare the Industrial Production of one country to the other using this web portal. The graphical representation of the historical data will give you a clear understanding of how this data changed over time. You also get to change the graphical representations according to your preference. A ton of more information related to the latest news in that regard is provided to give you a better understanding.
GBP (Sterling) – https://tradingeconomics.com/united-kingdom/industrial-production
What do traders care about Industrial Production and its impact on the currency?
Industrial production data generally reflect similar changes in the overall economic activity. So if the industrial production increases the currency of a country will get stronger, and if it decreases, the value of the currency decreases as well. Achieving strong figures in this regard can cause a bullish sign for the country’s currency. Traders must try to understand the importance of this economic indicator and consider keeping a watch on them as they can have a direct impact on the currencies they are holding.
Frequency of the release
Central banks release the industrial production data of a country on a month-on-month basis. This helps the governments to understand even small changes in supply and demand for raw goods in the industrial front as any changes in the prices of these, can directly impact the end consumer. The frequency is on a monthly basis but the release dates of this data might differ from country to country. Typically it is between 16 to 30 days after the month ends.
The Bottom Line
Since the industrial production data is a leading indicator of economic health and reacts quickly to the ups and downs in the business cycle, it is directly correlated with the consumer conditions such as employment levels and earnings. There are many advantages this report provides, like the individual sector breakdown data of production which will help the governments in understanding and inspecting them. The industrial production report also provides valuable analysis by removing high volatile components to provide relevant trend line and avoid incorrect data by eliminating outliers. The frequency of the released is also an advantage because the report is published just weeks after data is measured.
However, there are a few disadvantages to the industrial production report. This report only deals with physical goods but not intangible services. This makes up to only half of the economic output. Even when the data is collected from different credible and reliable sources, a part of it is estimated and projected to arrive at the final numbers. Traders and investors of the forex market should consider watching the industrial production numbers of a country before they make long term investments in their currency.