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Economy in Brief

EU Commission Indexes Log Small Step Back After Strong Recovery Run
by Robert Brusca  August 30, 2021

The EU Commission index stepped back in August as the Covid-19 Delta variant stepped up. So far while the step down in the EU measure is of significant size, it pales in comparison with the recent strong rebound from the depths of the Covid-created recession. The queue standing of the headline gauge is at its 98.9 percentile- that is impressive. It is, in fact, the fourth highest reading since July 1990. Getting ahead of the story, the industrial and retail gauges are each the second highest readings on this same timeline. The industrial reading is coming off its timeline peak from July. All in all, there is a clear step down in the economic assessment this month, but it is from very elevated levels, pretty much all around.

Sector overview
By sector, the industrial measure, retailing and construction all have 90th percentile decile readings. The weaker sectors have rankings in the 86th percentile (consumer confidence) and in their 84th percentile (services). They are weaker but not weak.

Caveat data-user
I'll offer the caveat here that these are still only diffusion indexes which means they are statistics about the breadth of the increase not of the strength alone. There is a clear high correlation between those two concepts. Still, because of the virus meant some firms were being put out of business they would not be responding to surveys and their absence would mean that they are not counted by diffusion; yet, their output will be missing from conventional gauges that would then be recorded as weaker. This is immediately evident in comparing the unemployment rate with the EU Commission index over time. Not only do unemployment data lag, which is common when compared to other activity gauges, but the dynamics in the two series look quite different. Diffusion data are still interesting, but they are not the whole story, so use them wisely.

Country level data
Country level data are more mixed on a month-to-month basis. Of 18 early data reporters, eleven show declines in their respective country-level indexes. Each of the four largest economies post declines and three of them show declines are more than one percentage point month-to-month. All four of the largest economies had improved in July, and nonetheless there were declines in 11 members then.

The rankings, however, remain uniformly strong in August. Nine -that's half of the reporters have percentile standings in the top 10-percentile of their historic queues of data. Only five countries have percentile standings below their 70th percentiles and among those only one, Slovakia, has a standing below its median (below 50). Germany, Austria, Luxembourg, Belgium, and Finland have rankings in their top ten (not just top-ten percentile) on data back to 1990. These are impressive, strong results counterbalanced with little weakness or moderation and mostly complemented by relative strength elsewhere. That's the good news.

Since Covid struck
The right-hand column shows the change in each sector since January 2020, before Covid struck. The EMU index is up by 14 points since then. The industrial sector reading is up by 21 points. No other sector or industry gauge has gained more than 6 points on that timeline. The industrial sector improvement is driving overall results.

By country, there are double digit gains in two of the four largest economies Germany (+16) and Italy (+16). Then there are double-digit gains in seven other EMU members (in order: Luxembourg, Finland, Austria, Belgium, Malta, Estonia, and the Netherlands). There are declines in Cyprus, Slovakia, Austria, and Lithuania. Latvia is dead flat to its January level. While countries rank standings are impressively solid to strong, the gains being made since before Covid show more variation.

Sector stories
The sector stories are interesting and not exactly intuitive. Germany has the highest rank standing on this timeline at 99.5; that helps to kick the EMU overall rank standing up to 98.9, much stronger than even the unweighted average of the four largest EMU members presented in this table. Obviously, the weights put on sectors have a lot to do with the impact of the sector readings, not just the height of the sector readings. We see this again in looking at sector rankings within countries. Germany's sectors average a ranking of 84.6%. But Italy has each sector with a 90th percentile or better standing. Still, Germany's overall EU ranking at 99.5% trumps Italy's at 97.3%. If we look at the standard deviation among the sector rankings within countries, Germany's shows a variation of 13.9 points compared to Italy at 2.2 points. The Italian economy is moving together and at high standings with the lowest variation among major sectors of any of the four largest EMU economies (or for the EMU overall for that matter). Germany shows more variation than any other economy and it clearly is being dragged ahead by its industrial sector. Germany's consumer confidence ranking is the lowest reading in the table of any sector in any country. Spain has the lowest EMU sentiment rating but the variation among its sectors is the second lowest in this group marking Spain's recovery as slower than the rest but more balanced than all but Italy.

The virus, is the virus... ain't the virus
What I mean by this heading is that yes Europe continues to watch the virus and it continues to disrupt activity. And this is the same as it has done since it first appeared. But the virus is changing. We are discovering more about how vaccines work, and the news is not good since vaccine effects seem to decay- at least for some people. That's like having a silver bullet for a werewolf that only incapacitates him (or her) for a while. The implications are quite different for that of a last cure or immunity.

Europe has also fallen behind in the pace of vaccinations as the Delta variant has spread. This has worsened the problem of spreading infection. There now seems to be more controversies about how the vaccine works although health officials are simply trying to increase the number vaccinated as a solution. While booster shots are mooted as a problem-solver, WHO is against that because it would divert vaccine from the developing nations that have not had a first round of inoculations yet. And it seems that the booster approach would put us on a never-ending cycle of getting new boosters- globally. That also means that the virus would linger longer and have more time to spawn more variants… more risk?

This is beginning to look awkward and even infeasible especially if new variants form. For now, I do not think there is a cohesive long-term plan to eradicate the virus. Unless a new more powerful long-lasting vaccine is offered, these mRNA vaccines simply seem to wear off making them a tool but not a solution. They were fast to develop and they have been helpful, but they do not seem to be a long-term solution. This leaves Europe and, of course, the rest of us up in air about what's next. The good news is that while this variant is more infectious it has not recorded as many deaths or as much hospitalization. It is not as potent as the previous strain. How much it will disrupt economic activity looking ahead depends on how people view it and that may be different from its true riskiness.

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