German and Other Expectations Are Capped and Contained

The current economic situation in Germany and for most of the countries in the table continues to improve as expectations are being capped or set back in August.

The current situation in the euro area advanced by 10 points month-to-month in August as Germany barely ticked higher, the U.S. gained nearly five points, Japan gained nearly 15 points, France gained five points and Italy gained 14 points. Germany has the smallest current improvement and the highest overall standing for its current situation index at better than a 95th percentile queue standing. Japan, with a much smaller diffusion rating for its current situation, yet has nearly the same the queue standing as Germany, a diffusion configuration that tells you much about the differences in economic performance in these two economies in recent years.

The EMU has an 88th percentile standing, the U.S. has an 83rd percentile standing and Italy has a standing in the mid-70th percentile while the U.K. alone has a below median standing at its 45th percentile. Only the U.K. and Italy have net negative current situation assessments as France has crossed over to a positive reading this month.

Conversely, expectations are consolidating or backtracking in August. Germany loses 7.5 points on its expectations index in August; the U.S. loses five points, Japan is unchanged. The U.K. ticks slightly lower on a headline reading that is steeply negative, France sheds over 11 points while Italy alone shows some improvement with expectations ticking up to 11.5 in August from 10.3 in July. The percentile standings are largely in their respective mid-to-upper 30th percentile deciles with the exception of the U.K. which has a lower 7th percentile standing, France with a 70th percentile standing and Italy with a 47th percentile standing.

Expectations for oil prices are lower this month and are down to a 75th percentile standing. Inflation readings stand in their respective 60th percentile deciles usually in the low to mid 60th percentiles with two exceptions. Inflation in the U.K. has a 73.7 percentile standing as the weak pond has let some inflation blossom through the import channel. The second exception is Japan with only a 32nd percentile standing for inflation, nearly half that of other countries. Still, inflation everywhere has been hard to start. And even where it has started in the U.K., it is quickly losing momentum.

On balance, the month's readings are hard to handicap. On one hand, the current situation has improved and its standing gauges are firm-to-strong. Still, two countries still have negative readings (the U.K. and Italy). France made a small improvement on the month as did the U.S. and Germany. So the up thrust to European momentum is not uniform although levels of activity are still strong. Expectations show more weakness in terms of monthly levels and changes. And inflation does not seem to be viewed as much of a threat; yet, the ECB is still being pushed by Germany to get off the loosening trend for monetary policy and to begin to tighten things up. But it is not clear that the data are of yet ready for that policy shift. The evidence of a pick-up in momentum to justify step up in monetary tightness is largely missing as is an adverse-enough inflation reading.