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Economy in Brief

EMU Sentiment Index Moves Higher
by Robert Brusca  September 29, 2021

The EU Commission industries for the EMU region moved higher unexpectedly in September. The index rose to 117.8 this month from 117.6 in August. Two of the four largest countries showed increases in their respective indexes while two others showed declines.

Among the 18 early reporting EMU members, 11 countries showed declines month-to-month with most of those that fell, showing monthly declines of more than one percentage point. This follows the month of August where there also were broad based declines. July, too, had showed relatively broad-based declines across the EMU region. Although different countries showed declines in these three months, there were declines in 11 of the 18 reporting countries in each of these adjacent one-month periods. In August the four largest economies showed declines, in July none of the four largest economies showed declines, while in September the mix was split.

Across the last four months, the European Monetary Union has showed very flat responses across the industrial sector, retail sector, construction sector, in services as well as for consumer confidence. These five metrics have very little variation in these recent months. The sectors made strong 'trend gains' and since have sat on a plateau for four months. In September, only two of these industries showed an increase; they are construction and consumer confidence. But the industrial sector was flat at a reading of 14.0. But that was enough 'strength' to advance the level of the overall EMU reading.

The EU Commission indexes seem to have stalled out at relatively high standings; among these five different sector metrics four of them reside in the top 10% of their historic queues of data with only the service sector having a (still quite firm) 78.1 percentile standing. These are extremely strong standings for the Monetary Union.

However, momentum has broken down; there is this relatively long four-month plateau where there has been little change in the various sector indexes. In addition, there has been very little change in most of the sector indexes since the virus struck in January 2020. From that benchmark onward, the industrial sector is up by 21 points; however, consumer confidence is up by only four points, the services sector is up by only four points, the construction sector is up by only two points and retailing is up by only one point. Those are thin net gains for a period of 20-months. The increase in the overall EMU index from January 2020 of 15 points is almost wholly because of the large gain and the high weight associated with the industrial sector.

Among the 18 earlier reporting EMU countries, there are 8 of them that rank and the top 10 percentile in terms of the level and the EU Commission index reported in September. There are only two countries, Slovakia and Latvia, that have queue percentile standings below the 50th percentile although Slovenia is barely above the breakeven 50th percentile mark at 52.3%. Still, the overriding message for the monetary union is that countries are performing well, that sectors have strong readings across the board, and that countries have strong readings within the monetary union itself. But momentum may be questionable…

Looking at momentum by country, there are only four countries that show EU Commission indexes weaker than they were in January 2020 and those are Cyprus, Slovakia, Latvia, and Lithuania. But on at same timeline, Greece and Portugal show unchanged levels on their EU indexes from January 2020. By comparison, the large countries are doing better: Germany, for example, is up by 16 points, Italy is up by 15 points, and France and Spain are each up by seven points from January 2020. These are the four largest countries in the monetary union by GDP size.

We can also assess performance in the monetary union by looking at the ranking of sectors by country by inspecting the four largest European monetary union members: Germany, France, Italy, and Spain. Three of these four countries have top-ten overall percentile standings; they reside in their respective 90th percentile or on the verge of their 90th percentile. The exception is Spain that still has a very strong standing at the 85th percentile.

The industrial sector is strong in each country with 90th percentile standings everywhere except France. Consumer confidence has firm-to-high standings in all countries but with 90th percentile standing only in France and Italy; Spain's standing a bit more pedestrian at 63.7 percentile, Germany has a 76.5 percentile standing. Retailing shows the most variation with a 93rd percentile standing in Germany and a 34th percentile standing, below its historic median, for France. Retailing still has an 84th percentile standing in Italy and a 79th percentile standing for Spain- all solid-to-strong readings. The services sector is more uniformly moderate with percentile standings in the 60th percentile and the 50th percentile in three countries with a unique 90th percentile standing only in Italy.

Sectors in the Largest Economies

For the most part, the metrics on the European monetary union show strength at the country level and strength across industries. But there has not been much progress overall since the virus arrived in January 2020 and there is this recent plateau that all sectors seem to be on. However, the virus struck the economy down and there has been a strong recovery from that period of weakness back to the level that had prevailed before the virus had its impact. There has been a revival to a level that is also relatively strong by historic standards. The EMU may be on a plateau, but it is a favorable one.

The problem going forward is that in the monetary union as well as the United States clearly are facing rising inflation. Germany, today, reported the strongest import prices that it had seen in nearly 40 years. Central banks are coming to see inflation as a risk and potentially as a threat to growth. We are seeing them begin to gradually back away from their uniform view that inflation is temporary or transitory. However, as of yet there have been few policy changes among central banks that have the most highly traded currencies in the global marketplace. We have various central bank officials talking about policy changes that are needed or will be needed but that's different from acting. We are, however, seeing some considerable turbulence in stock markets as the stock markets are beginning to see more risks, more entrenched inflation, and what appears to be some new threats to growth in China where energy problems are emerging. Closer to home, in the U.K., there is even a somewhat contrived fuel shortage problem that was created by rumors that there would be a fuel shortage problem. Some time that is all it takes.

However, there are more substantial concerns about natural gas supplies and whether there is a risk to Europe when winter comes since energy stockpiles are low. Europe is not out of the woods. The Coronavirus is still circulating and still a risk that health authorities don't completely know how to deal with. There are more tools to deal with the virus; but even these tools are not fully understood, and as we come to know them better, we're coming to know them to have certain problems and flaws that will have to be worked around. While the outlook has improved in many ways, there are continuing threats and there will continue to be risks. The strongest growth of the early recovery period is giving way to something that is milder and may become more difficult to nourish given the requirement that monetary policy address inflation and the need to pull back on fiscal assistance. Is global private sector ready for that? Will the virus let it respond? There are the important unknowns of today in addition to China...

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