Europe Slows As Inflation Cooks Hotter Than Ever

Growth in the European Monetary Union in the third quarter gained 0.7% at an annual rate quarter-to-quarter. This is a sharp deceleration from the 3.3% annualized growth rate in the second quarter as well as from the 2.4% annualized growth rate in the first quarter. Growth year-over-year has now decelerated to 2.1% in the third quarter compared to a 4.3% growth rate in the second quarter.

Inflation rises Not only is growth slowing but the inflation rate has risen. Inflation in October has risen to a 10.7% annual rate, its highest increase year-over-year in this cycle. Despite the slowing in GDP, there is no break on the inflation side. Over six months inflation escalates further to an 11.1% annual rate and over three months inflation cooks at a 13% annualized rate. The inflation situation remains intense while growth is slowing.

Among members growth mostly decelerates in the quarter Only a handful of countries' specific GDP numbers are available for the third quarter. In France, GDP is up at a 0.6% annual rate, slowing from a 2% pace in the second quarter. Germany's growth accelerated to 1.1% quarter-over-quarter pace, compared to 0.4% in the second quarter. Italian growth slows to 2% annual rate in the third quarter from 4.4% in the second quarter. Growth in Portugal is up to 1.6% annual rate compared to 0.4% in the second quarter, and finally Spain grows at a 1% annual rate in the second quarter, a sharp shift from the 6% annual rate in the second quarter.

Large EMU economies do better The four largest economies in the European Monetary Union have growth at 1.1% in the third quarter compared to 2.4% in the second quarter. For the rest of the euro area, growth in Q3 declines by 0.3% at an annual rate in Q3 compared to gaining 5.9% at an annual rate in the second quarter.

Large vs. Small EMU economies Year-over-year growth rates are slower across the European Monetary Union; for the four largest economies the growth rate averages 1.7% in the third quarter compared to 3.7% in the second quarter. For the rest of the EMU, a third quarter rate of 3.2% year-over-year compares to 5.8% in the second quarter. Both the largest and the smallest economies show a downshifting and growth of two percentage points or more based on the year-over-year growth rates. Year-on-year growth rates favor the smaller economics that are nonetheless weaker in the current quarter.

Growth slows broadly across countries Growth slows in the third quarter for each of the five economies that separately report data as well as for the European Monetary Union measure based on 19 countries. However, each country has its own tendency to grow; the table evaluates the growth rate for each of these units compared to its historic tendency. The European Monetary Union's growth ranking for the year-over-year rate for the third quarter is in its 64th percentile. For the four largest economies, the growth rate is in the 60th percentile. Portugal's growth has a 93.5% standing while Italy's growth has an 85.9 percentile standing. Growth in Spain has a 75-percentile standing. However, Germany has only a 40.2 percentile standing, and France has only a 29.3 percentile standing.

U.S. trends are different During the same time, U.S. growth has a 35.2 percentile standing on a year-over-year growth rate of 1.8% that is essentially unchanged from its second quarter pace and for a third quarter growth rate of 2.6% that accelerates from a -0.6% rate in the second quarter. Comparing the U.S. to Europe, it's clear that there are very different things going on in Europe compared to the U.S. although both economic units are showing elevated and difficult inflation outcomes.

Inflation in Europe Turning to Europe's inflation issues, we see prices accelerating steadily in Germany and steadily in Italy. However, inflation is decelerating steadily in France and in Spain. In France, inflation is only 7.1% over 12 months, declining to a 7% annualized pace over six months and to a 5.6% pace over three months. In Spain, the 7.4% 12-month pace slows to 5.2% over six months and declines at a 3.6% annual rate over three months. Only Spain has made the transition to falling prices over three months. German inflation, in fact, shows some extreme acceleration from 11.6% over 12 months to 12.4% over six months, jumping up to 18.8% over three months. However, Italy posts even higher inflation and even more acceleration with a 12.7% 12-month pace, rising to 17.1% over six months and to a 23.3% annual rate over three months. These data clearly show that the inflation trends within the European Monetary Union are diverse.

Inflation excluding energy is not better-behaved Core or ex-energy inflation statistics are available at this early date for Germany and for Italy. For Germany, the measure is ex-energy; for Italy, it's a core measure. German ex-energy inflation also shows acceleration with inflation rising from 6.5% over 12 months to a 7.8% annual rate over six months to an 11.3% annual rate over three months. In Italy, acceleration also continues for the core measure. Inflation rises by 5.7% over 12 months, kicks up to an 8.1% annual rate over six months and rises again at an 8.4% annual rate over three months for Italian core inflation.

No silver lining There is no silver lining here for the measures excluding energy or excluding food and energy. Headline inflation is high, core inflation is high, inflation in Europe is stubborn. Inflation in Europe is accelerating and it's doing that for the headline and it's doing that for the core or ex energy measures as well.

Ukraine – Russia Meanwhile, the most significant news of note from the Russia-Ukraine war is that Russia has backed off from the grain deal and that will put a lot more pressure on global food supplies and on food prices. Russia claims it's backing off after Ukraine's attack on the bridge that links the Crimean Peninsula to Russia directly. Of course, Ukraine continues to fail to acknowledge Russia's sovereignty over the Crimean Peninsula or over any area in Ukraine that Russia has moved to annex regardless of whether there has been some sort of elections run there or not. And Russia's continuing to pound the civilian population in Ukraine by destroying energy facilities there with winter coming.

Summing up Economic trends, geopolitical trends and the inflation trends in Europe all are showing a great deal of stress. The U.K. has a new Prime Minister who seems to have the resolve and the mandate to attack the problems that the United Kingdom faces, especially after the short and turbulent tenure of his predecessor. More broadly, global conditions remain challenging with the U.S. also facing an economy with sputtering growth and high inflation although the U.S. still possess extremely strong labor market conditions. It's a strange time for policymaking and for policymakers. Despite the steps that central banks have taken, it appears that a substantial challenge and much more work still lies ahead.