EU Indices Continue to Fall Sharply

The EU Commission index for EMU in September fell to 93.7 from 97.3 in August. This is another sharp monthly drop as the index has fallen to its 26.7 percentile. That means the index has been weaker than this only about 26% of the time.

All the sector assessments in the month have weakened. The industrial reading fell to zero from +1, consumer confidence fell to -28.8 from -25, the retailing reading fell to -8 from -7, construction fell to + 2 from +3, and the services reading fell to + 5 from +8.

The percentile standings for the sectors are low as well; the industrial sector reading is firm with a 70th percentile ranking. The one strong reading on the table is for the small construction sector which has an 87.4 percentile ranking. Retailing comes in with a ranking above its median at 53.0. However, the consumer confidence ranking shows that that index is at the weakest level that it has seen on this time horizon. And the all-important services sector that is the major job creator has the 37.8% standing, well below its median. Rankings below their 50% mark are below the medians for each of these rank metrics.

An assessment of changes across all EU members shows that declines in the last three months have been extremely broad-based with a month-to-month increase being the exception rather than the rule. Only three countries showed month to month increases for their overall indices in September, in August only two showed increases and in July only three showed increases -this among a total monthly count of 18 changes The country rank standing is extremely weak as well. Only Greece and Cyprus have country level indices with standings above their historic medians (above 50%). All the other countries in the table show EU index readings that stand below their historic medians. This is widespread weakness. Nine countries have ranking below their 20th percentile. Another seven are below their 40th percentile (and above their 20th percentile).

In addition, all countries show changes in their EU indices that reveal weakness compared to their January 2020 levels before the COVID virus struck. All the sector metrics how below their January 2020 levels except for the industrial sector that is higher by 5 points. The overall EMU metric is lower on balance by 11 points.

Pooling all these signals together, what we see is an area in which the index standings are weak. They are weak across the board for nearly all countries. Readings are weak or moderate in most sectors. The readings are extremely weak in the job creating sector. And there has been substantial weakening in recent months.

The war in Ukraine clearly is taking its toll. And inflation continues to run high in the European Monetary Union. The European Central Bank has begun to take steps to cool inflation, these steps are early and even though monetary policy has not been terribly restrictive yet, the economy is already showing signs of stress largely because of concerns over the sustainability of energy supplies. With readings like these, and with inflation still high, the ECB still has a big job of inflation fighting ahead of it. In this situation, it would be a miracle if Europe were able to avoid recession. I don't think there's going to be any miracles here.

Separately the UK and its new Prime Minister has been trying to find a way to attack its inflation problem and yet support its economy. Recent efforts to cap energy bills to the public and to create stimulus and incentives for investment have sent the pound to a new low. The United Kingdom is trying hard to find a way out of its dilemma. But it's very hard to set policy at cross purposes – to use monetary policy to stuff inflation back into the tube and to stimulate growth with fiscal policy and not have these policies collide. It is a collision between these policies and the confusion that it creates in markets about what the government really intends to do that has caused distress in the UK financial markets and the pressure on its exchange rate.

These reactions, of course, also are lessons for the European Monetary Union about the constraints it faces with its policy. The ECB has been slower than the Bank of England to change policy and to raise rates to fight inflation. However, there has been no effort to use fiscal policy to cushion the economies. The European Monetary Union members are facing energy crisis that the United Kingdom doesn't face.

The war in Ukraine continues to be a huge uncertainty especially with President Putin once again saber rattling over the use of nuclear weapons saying specifically this threat is not a bluff. Russia is running sham elections in some of the seized Ukraine territory. Russia is trying to argue that these territories are Russian rather than Ukrainian. However, the West has not recognized these cobbled together polls. Russian policies have become so unhinged that they no longer can be hidden from its own public and there is now an exodus of young Russian men out of the country trying to evade the call to arms that Putin has made to try to reinvigorate his attack on Ukraine. Seeing Russia as the enemy of Ukraine this instability in Russia would seem to be a good thing, however, instability in Russia is also a very dangerous thing. It could motivate President Putin to take more risk and to engage in policies that otherwise would be construed as unthinkable. Europe finds these risks right on its doorstep.