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Economy in Brief

EU Indexes Gain Ground in October
by Robert Brusca  October 28, 2021

The EU Commission indexes for October showed an improvement for the EMU area based on its composite index. Of the five sector gauges, there is improvement in three, deterioration in one and an unchanged reading in another. Among the eighteen early reporting EMU members, ten showed month-to-month improvement while eight backtracked on the month. Only one of the four largest economies backtracked, but that was Germany, the largest EMU economy.

The chart shows that the EMU indexes for the four largest economies have moved up strong after falling fast and have rebounded to reach a high level. But over the past four months, there has been little progress and the EMU indexes have moved mostly sideways.

In fact, the recent trends show that conditions have gone flat or worse over the last four months. Over the last four months, the overall EMU index is up by 0.7 points. This is on a 1-point rise in the industrial sector, a 4-point rise in construction, no change in services, a decline of 1.5 points in consumer confidence, and a 3-point decline in retailing. That’s a mixed bag of numbers. The four largest economies average a change of 0.6 points on this four-month timeline. While most countries show some improvement over the last four months (ten of eighteen), the ones with declines on the period show such large declines that the average change across the eighteen reporting EMU members over the last four months is a decline of 1.9 points. So, obviously the difference is being made by the weighting, the fact that large countries (like the four largest economies) are doing better, much better.

I am not arguing that the weighting scheme is wrong, rather that there is a lot of irregularity in performance in the EMU and it cuts across countries and that in turn can extract a political response weighting or no weighting. While sentiment levels are clearly high and substantial across the board, momentum has gone dead.

Speaking to the issue of high confidence is the fact that four of five EMU-wide sectors have queue standings in their top ten percentile and the one that does not is in its top 12-percentile- not far behind. In short, no sector is weak- all are strong and solid.

Looking at countries, we get the same solid results but in a larger group with more variability. Of eighteen countries, nine -that’s half of them- have a top ten-percentile standing in their respective country sentiment indexes. One country has a standing in its eighty-eighth percentile (88.2%, at that). Three countries have 70th percentile standings and two have sixtieth percentile standings. There is one country a hair above its 50th percentile standing (Latvia, 51.8%) and only two with standings below their historic medians (below the 50th percentile: Slovenia and Slovakia). It’s no wonder that the overall EMU measure has a standing in its 99.5 percentile. That standing means that the compositive EMU index has been this high or higher only 0.5% of the time historically.

Looking at sector performance across the four largest economies shows us that they have solid strong and consistent readings. It is no wonder that each of the four largest EMU economies has a top ten percentile standing for its overall EU sentiment index.

Still, the EMU rate of unemployment in August is at 7.5% and it was as low as 7.1% before Covid struck. From May 2020 to June 2019, the unemployment rate was 7.5% or lower. So while the EU indexes are on the moon, the labor market is still not fully restored to its best pre-covid status. The overall EMU unemployment rate is at its 9.2 percentile that is the bottom ten percent and in similar in a sense to the high standings of the EMU index (top 0.5 percentile). But the average queue standings for the unemployment rate across a group of twelve of the longest standing members only averages in its bottom 33% - the median rate is 26% (that would be like a 66-percentile standing for the EMU indexes). In fact, the average EMU standing among the eighteen reporting members is 79%. Any way you look at it the economies evaluate as in better condition than the labor markets and that means recovery’s job is not done even though momentum seems to be lost.

However, all aggregate EMU sector indexes are now above the level they occupied in January 2020. And all countries except five are stronger with the exceptions of Slovakia (-8-points), Cyprus (-6-points), Slovenia and Lithuania (-3-points), and Latvia (-1-point). Meanwhile, nine EMU member countries are better off by double-digit point gains. Europe has come back a long way. But inflation is elevating and the ECB – like the Fed in the United States- is making monetary policy with crossed fingers. Let’s hope that works.

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