In February, the European Commission economic sentiment index from the monetary union declined to 95.4 from January’s 96.1, a surprise development. This drops the reading below even its December level but above its November level. Declines are logged in three of five sectors with the industrial sector, the retail sector, and the services sector, each weakening month-to-month. The construction assessment was unchanged between January and February while consumer confidence increased to a -15.5 reading in February from -16.1 in January.
Introducing
Robert Brusca
in:Our Authors
Robert A. Brusca is Chief Economist of Fact and Opinion Economics, a consulting firm he founded in Manhattan. He has been an economist on Wall Street for over 25 years. He has visited central banking and large institutional clients in over 30 countries in his career as an economist. Mr. Brusca was a Divisional Research Chief at the Federal Reserve Bank of NY (Chief of the International Financial markets Division), a Fed Watcher at Irving Trust and Chief Economist at Nikko Securities International. He is widely quoted and appears in various media. Mr. Brusca holds an MA and Ph.D. in economics from Michigan State University and a BA in Economics from the University of Michigan. His research pursues his strong interests in non aligned policy economics as well as international economics. FAO Economics’ research targets investors to assist them in making better investment decisions in stocks, bonds and in a variety of international assets. The company does not manage money and has no conflicts in giving economic advice.
Publications by Robert Brusca
Europe| Feb 28 2024EU Index Erodes; Germany Lags; Questions Are Raised...
Global| Feb 27 2024Money Growth Weakness Begins to Abate in EMU As Well As Globally
Money and Credit in EMU- Money growth rates in the European Monetary Union are starting to show clear acceleration although the move higher is moderate. M2 growth in the Monetary Union shows a decline of 1.2% over 12 months, an increase of 0.3% at an annual rate over six months, and a 1.2% annual rate increase over three months-- a clear moderate accelerating pattern. Credit to residents in the Monetary Union continues to waffle as it declines over 12 months and three months but manages an uptick over six months; private credit shows the same pattern.
Real balances in EMU- Real money balances that reflect money supply indexed for the effects of inflation also shows a tendency to move higher although it is still contracting on all horizons. Real money growth declines at a 3.9% annual rate over 12 months, declines at a 1.9% annual rate over six months, and declines at a 1% annual rate over three months. Real credit to residents in real terms shows no clear pattern but declines on the order of 2% to 3% over three months to 12 months. The same is true for real private credit.
Global money trends- Real money balances in the Monetary Union have been declining over the last three years, the same pattern is pretty much true for the U.S., the U.K., Japan, and the other major monetary center countries. U.S. and U.K. monetary growth are calculated through December rather than January because they are not yet updated. For both the U.S. and the U.K., real balances do not decline over the most recent three-month period. U.K. real balances are flat; U.S. balances increased at a 0.2% annual rate, a very small rate of increase. Only Japan, among the major monetary center countries, shows flirtation with growth in real balances even over the three years. Over three years Japan real balances grow by 0.6%; over two years they fall by 0.6%; over 12 months they rise by 0.2%; over six months they fall a 0.5% annual rate; over three months real Japan money balances are growing at a 1.7% annual rate.
United Kingdom| Feb 26 2024U.K. Retail-Is It Recovery or Just Volatility?
The Confederation of British Industry Survey of retailing and wholesaling showed that retail and wholesaling sales declines slowed sharply in the U.K. in February.
Retailing Retail sales compared to a year ago were at a -7 reading in February, compared to -50 in January and -32 in December. This is a sharp improvement compared to the numbers sales had been posting; however, it is still in the lower 26-percentile of monthly reported metrics since 2000. But it is also the fifth largest month-to-month improvement on that that timeline of 284 monthly changes reported since mid-2000. This is a sharp monthly gain but still a very weak number. Orders compared to a year ago locked-in another declining figure at -14 in February, but again it was sharply better than the -36 logged in January and the -54 in December. Orders compared to a year ago have a 22.5 percentile standing. Sales, for the time of year, also improved sharply, logging a -1 reading in February compared to -47 in January and -25 in December. Sales, for the time of year, moved up above their median for this timeline to log a percentile standing in the 61st percentile. The month-to-month gain was sharp, ranking as the sixth largest change in the month-to-month survey value since mid-2000. On ranked data, the median occurs at a ranking at the 50th percentile. The reading for stocks rose slightly to 17 in February from 15 in January and also has a rank standing above its historic median, which is a standing at its 56th percentile.
Expectations March expectations for retail sales compared to a year ago also improved sharply- still logging a negative figure at -15 in March compared to -50 in February and -41 in January. However, the reading had been as strong as -6 in December of last year. Still, the month-to-month jump in the survey is the fourth largest month-to-month change in the survey value on data back to mid-2000. The ‘sales for a year-ago’ figure, despite its extraordinarily sharp improvement from February and January, still has a lower 13th percentile standing when placed in their historic queue of ranked data. Orders, for the time of year, were not much changed from February, logging another deeply negative number at -36 in March compared to -35 in February and -29 in January. The standing for the March reading is in its lower 5.6 percentile, an extremely weak reading. This is the one category that occupies a middle ground standing and does not have a strong monthly improvement. Expected orders are weak and have been bottom-scraping and weak for the last three to four months in a row. These survey responses are perplexing. On one hand, we are seeing ‘near record’ improvement month-to-month in several important categories but are still left with what are generally quite weak readings in the aftermath of those sharp improvements.
Germany| Feb 23 2024Germany’s IFO Confidence Measure Weakens in February
The German IFO diffusion survey weakened broadly in February. The index survey is over 5 industries plus provides an overall all-sector reading and applies itself to three venues: climate, current conditions, and expectations. We assess the readings on these 3 broad environments across the five industries on data back to 1991 and on that basis only one reading out of 18 has a standing above its median. That reading is under current conditions and the sector is construction. The construction standing; its 53.7th percentile standing places it barely above its historic median; the median on ranked data occurs at the 50th percentile mark.
Turning to the three broad areas that are surveyed, the all-sector standing for climate in February is at its 5.7 percentile. The All-sector standing for current conditions is at its 11.7th percentile and the all-sector standing for expectations is at its 9.1 percentile. In all three of these environments the readings are exceptionally weak. The climate is weak, the current conditions are weak, and they've been weak for a prolonged period. Despite that extended weakness, there continues to be weakness in expectations. This extended period of weakness has not been used successfully to repair the view of the future.
Far right-hand columns, in addition to the long-dated percentile standing column, present a column determining changes in these various metrics since January of 2020 just before COVID struck. None of the 18 readings is higher than it was in January 2020. The all-sector summary statistic for climate is lower by 24 points, for current conditions it's lower by 29 points and expectations are lower by 17 points. In all cases the stepdown compared to the pre COVID period is quite substantial. This means all these German metrics continue to run substantially below their performance of four year ago.
The far-right hand column of this table ranks data on a different timeline from the period just before Russia's invasion of Ukraine. The three venues show conditions are weak across the board although they are starting to see some stabilization on expectations. The all-sector climate index is at its low point right now at a ranking of 0. Current conditions have a ranking of 4%, extremely low and rarely lower. However, expectations have a ranking at the 48th percentile. This reading is close to the median - and recall that these statistics are being generated only since the invasion of Ukraine by Russia, so this is still a period in which the readings are going to be low - the assessment is that in February expectations are still hovering at the median for this period. And that's better than the other functional assessments for current conditions and climate by a long shot.
The chart gives us a means to understand this. If you look at the plot for the three functional surveys for climate, current conditions, and expectations note that at the very time of the invasion expectations fell very sharply immediately, while current condition and climate readings continued to erode somewhat slowly. Expectations fell to a low point and have hovered there persistently near that low, while current conditions and climate have proceeded to erode as time has passed.
The IFO survey does not paint much of an optimistic picture for this month period conditions continue to be quite weak and then the current conditions framework only services improved month-to-month. Expectations continue to show extremely low net negative readings across industries with only minor change. Climate weakened month-to-month I February except in three industries, those being construction, services, and wholesaling but only to a very minor extent. There is little reason for optimism in the wake of this survey.
France| Feb 22 2024French Industry Climate Improves Production Outlook Weakens
Climate improved for industry in February. Manufacturing production expectations nonetheless weakened in February falling to -8.1 from -7.0 in January.
The recent trend for production is a net negative reading in February but it is improved from its weaker reading in January. The own-industry likely trend is assessed as stronger in February, that metric is the respondents’ assessment for the performance of his own industry, but that one too is weaker in February than in January. Both are below their historic means.
Orders and demand are a net negative in February, that reading is still above its historic mean. Orders and demand in February are slightly stronger than in January. Foreign orders improved in February and are well above their historic average.
The own prices and manufacturing prices overall weakened in February. Both are substantially weaker than a year ago, as well as below historic means.
Evaluated over the sample period back to 2001 all entries in the table are weak, below their historic medians, (a ranking of 50); foreign orders are the exception, they have a high 72nd percentile standing.
Foreign demand is an important factor supporting the French economy. Domestically the economy is struggling and politically dealing with farm protests. European conditions remain touch and go with the war on its door-step and new pressures to generate support for Ukraine while the US sorts out where it will stand in the middle of a political impasse.
The recent trends and expectations for production have weak standing and momentum. The good news is that inflation has weak momentum and a low standing, too. It is being driven back. The ECB is determined to reduce it further. A recent ECB communication has deemed the greater risk to be the risk of turning to ease too soon. Like in the US at the 11th hour central bankers in Europe may finally be waking up to the idea that reducing inflation from extremely elevated levels can be done but getting it all the way back down to target is more difficult and will require a more concerted effort. For a while it appeared that central bankers would be willing to cruise with inflation in an uncomfortable zone still above target. Now maybe they are deciding that they really need to get to their target values sooner rather than later. However, the state of the French economy is a reminder as to why this is difficult. The French economy is weak and in recession. It wants interest rate help. Markets have been looking for rate reductions for some time. But central banks had been so reluctant to hike rates further when inflation peaked, that they are left with inflation progress to proceed slowly, and this could also mean lingering high rates to go the final mile on inflation progress. This is not what markets want now. But it is a reminder that policy choices that seem to avoid the hard policy options, often wind up paying the piper in a different way that may also turn out to be painful.
United Kingdom| Feb 21 2024UK Orders, Export Orders, and Inflation Jump Sharply in February
UK industrial orders (CBI Survey) jumped to -20 in February from -30 in January. The jump put orders back at their 12-month average (-21). Orders had been slipping steadily with averages over 12-months at -21 over 6-months at -25 and 3-Mo at -24 (or -29 as of one month ago). This month’s rebound not only boosts the 3-Mo average reading, but it takes the current month sharply higher breaking the cycle of deterioration.
Export orders were similarly impacted with a -21 average over 12-months and -24 over six-months. That average is cut to -21 over three months in February but last month the 3-month average was a much weaker -27. This month’s surge in export orders has turned around the deterioration for export orders as well.
Still, total orders only rank in their 35th percentile among order data back to 1992. Export orders are relatively stronger in February at a 55.6 percentile standing, above their historic median on data back to 1992. That is somewhat surprising given the widespread weakness in Europe. Part of the reason is that about 12% of UK exports go to the US where growth is performing much better. Still, the UK’s top 25 export markets account for 54% of UK exports that go to Europe.
Stocks of finished goods on hand weaken on the month falling to +11 from +18 in January and are now not much different from their average over 3-months, 6-months, and 12-months.
The outlook for output volume over the next 3-months slipped from +7 in January to +4 in February but the +4 reading, while a step back, is consistent with the past averages. Output expectations are in their lower third historic ranking at a 33.5 percentile standing, weaker than export orders on a standing basis but in line with total orders.
Pricing is a surprise...prices were last higher than this in July of last year. Prices had slipped to a reading of +7 in December and +9 in January but have now jumped in February to +17. This compares to a 12-Month average of 15, and three-month and six-month averages at +11. The UK has been showing inflation progress that has been substantial and ongoing in terms of the Consumer index followed and targeted by the Bank of England. The CBI survey reading suggests there has been a sharp reversal for industrial prices in February. Globally goods prices have been weak along with the manufacturing sector. But now CBI industrial prices’ standing has been boosted to their 77th percentile, a reading that is quite firm and bordering on "strong".
The UK survey is a mixed report in February largely because of the inflation reading. Orders show some welcome rise is in progress. Expected output backed-off some of the recent acceleration but remains around recent average levels that show weak expansion. However, prices are sharply higher. With the UK registering recession now and the Bank of England focused on getting control of inflation, this pop in the CBI inflation survey metric is unwelcome news.
Netherlands| Feb 21 2024Dutch Confidence Improves but Remains Deeply Negative
Dutch confidence in February improved to -27 from -28, a ‘small-potatoes’ gain mired in still-deeply net negative readings. The climate reading did worse, falling to -41 in February from -39 in January. But the willingness to buy improved to -17 from -20.
So, what do these index numbers really mean? We can first compare them to historic readings back to 1990. On that basis the three metrics are closely bunched in terms of their ranking. The queue percentile standings that evaluate each index number compared to its own history on this same time-line back to 1990 find them all at a standing ranking from the 18th-percentile to the 22nd percentile. That’s a tight bunching and a set of readings in approximately the lower one fifth of their historic queue of values. A lower 20th percentile reading is weak.
The progression of changes over 12-months to 6-months to 3-months shows a fairly steady increase over different periods (if you were to put them on a common per-month or per 12-month change basis). This is reinforced in the chart where there seems to be a liner progression higher that is relatively stable.
This means the confidence metrics are improving and doing so steadily but also quite slowly.
The table also provides change data back to just before Covid ran loose. The changes show all three metrics net lower on balance from their respective readings on January 2020. The climate variable has worsened the most followed by confidence overall with the willingness to buy metric seeing the smallest short-fall of the bunch. When it comes to shopping never underestimate the consumer. Shopping is a birthright, a palliative when things go wrong, it is a habit hard to stop even when the consumer has no money. As long as there is credit, there is shopping. Amen. No wonder willingness to buy is the least affected metric here, since Covid.
The Dutch economy is still struggling. Industrial production in manufacturing, like confidence, is trimming its year-on year negatives and is improving- but still declining on balance.
The Dutch manufacturing PMI survey moved up sharply in January but still did not quite climb all the way back to the neutral reading of 50.
Retail spending is also falling on balance over 12-months, but again, those 12-month declines have been diminishing as time has passed.
The evidence on the Dutch economy is that there is some progress being made but it is razor thin and slow. Of course, the outlook is brightened by the diminishing inflation rate in EMU and the added flexibility that will give the ECB in making policy looking ahead. Still, current conditions are negative on balance but still roughly stable while undergoing a snail’s pace repair. A call for hedged optimism is appropriate.
United Kingdom| Feb 16 2024Retail Sales Volumes Recover but Expectations Lag
Retail sales in January rose 3.9% after falling 3.7% in December and rising in November. The sequential pattern of nominal growth rates shows a pickup from 3.8% over 12-months to 4.4% over 6-months to 4.9% over 3-months.
During a period when inflation has been on the move changes in nominal retail sales are not the best indicator of what's going on with sales volumes. However, real retail sales (sales volumes) in the UK show a pickup with real sales volumes up 0.7% over 12-months, at a 1.7% annual rate over six-months, and surging at a 5.9% annual rate over three-months. Retail sales volumes show real sales in January rose by 3.4% after falling 3.3% in December and rising in November- the same general pattern as for nominal sales.
Passenger car registrations have fallen for three months in a row, and they show gathering weakness. Registrations are up by 7.5% over 12-months but they're falling at a 4.7% annual rate over six-months, and at a 17.1% annual rate over three-months. This is an important category for retail spending; automobile registrations are weakening and weakening more seriously.
Surveys on retail sales are mixed in their message. The Confederation of British Industry (CBI) looks at retail sales for the time of year and finds conditions worsening in recent months with a change in assessment of -6 in November turning to -9 in December and to -22 in January. That same CBI survey shows a reading change of -44 over 12 months -46 over 6-months and -37 over 3-months. All of these are net negative numbers and are simple changes unadjusted for the length of the time span. It is consistent deterioration.
The CBI survey also offers a survey on the volume of orders looking at year-over-year changes. The year-over-year pattern monthly is irregular with a + 15 in November a - 32 in December and a + 18 in January. Over 12 months CBI order volumes year-over-year register a drop of -4 over 6-months, an increase of +3, and over three-months a change of plus one. The plus one reading shows erosion in upward momentum compared to +3 over 6 months but it's still a positive reading.
The GFK reading on consumer confidence is a +3 in January from +2 in December, but both of those gains are lower than the +6 reading for November. Sequentially consumer confidence has slowed its gains slightly with a +26 reading over 12-months compared to readings of +11 over 6 months. The +11 ga over three months would be quite strong if it kept up for 12-months; then it would trump the +26 gain, logged over 12-months.
The table also chronicles the growth rate for the CPIH. There we see that the inflation rate for 12 months six months to three months has gradually been coming down, which is a good development.
Quarter to date (QTD) statistics are relatively ephemeral at this stage since we're looking only at January compared to the fourth quarter average. On that basis nominal sales are up strongly at a 10.4% annual rate, real sales are up at a 9.9% annual rate, passenger car registrations are falling at a nearly 20% annual rate. The survey data from the CBI shows retail sales for the time of year weaker with a -30 drop, although the volume of orders is higher and GfK consumer confidence improves.
The far-right hand column evaluates the growth of the Year-over-year percentage changes for ordinary retail sales data versus ranking on the index levels for the surveys. These show a middling 55.6 percentile standing for sales growth, although for the volume of sales, conditions appear much weaker with the real sales increase at only a 33-percentile standing in the bottom 1/3 of its historic range of values. The pace for passenger car registrations the year-over-year reading still has a nearly 72-percentile standing, but shorter terms growth rates show that is being undercut. The CBI assessment of sales for time of year is a very weak 1.6 percentile standing, the volume of orders year over year has an 8.6 percentile standing, and consumer confidence reading has a 35-percentile standing. All the surveys show weak conditions. These are conditions that are very weak in comparison with historic norms.
Summing up UK economy has been struggling. The recent GDP figure showed the 2nd decline in a row for real GDP conditions in the retail sector. Retail sales are somewhat mixed with current spending holding up better than expected but the more forward-looking gauges from the CBI and the relative position of consumer confidence would indicate caution in interpreting those events. Retail sales have had a pickup recently, but year-over-year growth is still modest and survey data on merchant plans is weak...
United Kingdom| Feb 15 2024UK GDP Contracts for the Second Quarter in a Row
A rule of thumb recession signal? I am generally not impressed with the signal of two declines in a row for GDP as an indicator for recession. News reports today are heralding the triggering of a ' technical recession’ signal for the UK, I will once again make the point that two negative quarters of GDP growth in a row is hardly a signal that is ‘technical’ this is a ‘rule of thumb’ judgement that is being rendered.
A rule of thumb signal, but trouble nonetheless The signal and the conclusion of recession based on this quirky measure mostly gives market participants a very quick and dirty way to assess what the economy is doing and how severe its circumstance might be. In this case, however, the depth of the GDP decline appears to be a little bit more severe than we have seen in other countries. The breadth of the declines across GDP categories suggests that this is something more serious than just the observation of two quarterly declines in GDP in a row. The UK economy appears to be in more serious trouble.
One of the first things to notice in the GDP table above is that while GDP has declined for two quarters in a row, it has logged the more severe, 1.4% drop at an annual rate, in the fourth quarter and the more modest -0.5% at an annual rate in the third quarter. Still, domestic demand grew by 1.2% in the fourth quarter after falling by 1.9% in the third quarter, domestic demand is somewhat weak but also choppy and unstable. Yet it is showing some resilience despite the overarching decline in GDP.
Year-on-year weakness, too However, in the lower panel of this table, we also see that this two-quarter decline in GDP, combined with previous quarterly weakness, generates a year-over-year decline in GDP and that makes the two quarter in a row decline a more serious event. In addition to GDP weakness, housing investment is falling year-over-year, exports and imports are both falling. Although, once again, as a counterpoint. domestic demand is rising by 3.1% year-over-year after another solid year-on-year gain in Q3 that began a recovery after a previous period of year-on-yar demand declines.
Weakening production One additional thing that I explore when I see weakness like this, is industrial production. On the industrial production front, we find even more weakness with fourth-quarter growth in the UK and manufacturing falling at a 3.6% annual rate: that's a relatively stepped-up pace of decline. In fact, consumer durables output is falling by 4% at an annual rate, intermediate goods output is falling at an 8.6% annual rate and Capital goods output is falling at a 3.7% annual rate. All of this adds to the notion of the economy weakening severely and broadly and with GDP also lower on balance over one-year this weakness assessment seems to go over the duration hurdle as well.
What makes weakness a recession? The three-metrics we look for to assess recession are (1) the depth of weakness, (2) the breadth of weakness, and (3) the duration of weakness. UK GDP falls quarter-to-quarter at the faster pace of 1.4% annualized in the current quarter. Is weakness gathering momentum? And, while industrial production in Manufacturing falls at an annualized pace of 3.6% in Q4, IP rises by 2.3% year-on-year in December. Still, other GDP components are considerably weak, as housing investment falls by 9% year-on-year, exports drop 10.3%, imports, which are linked to international competition as well as to domestic demand, fall by 2% year-on-year. Clearly domestic demand has helped imports to grow (and domestic demand is a clear positive for the economy, even though in the GDP framework an import rise subtracts from GDP). Exports are a drag on GDP as they fall; their weakness is a clear signal that the international sector is not helping the UK economy at all.
A profile of weakness The UK economy on profile is weaker that the Euro-Area where GDP is simply crawling at a slow-flat pace. The US is a marked contrast showing robust growth and acceleration.
The good news is that UK inflation is falling and that the core rate is on top of the Bank of England’s target over 3-months; the six-month inflation pace is falling sharply, but the targeted 12-month pace is still sticker and well above the target.
Consumer Confidence (GFK) has stabilized and even strengthened but it is still weak and retail sales volumes are weakening.
The overarching view is weak The UK eco-data, not just the GDP report, paint a picture of an economy in decline hinting at several kinds of stresses – but several key stresses are missing too. The pound sterling has remained firm-to-strong on a real effective exchange rate basis. That adds to confidence, but it does not assist in generating growth through exports. Various CBI surveys show a weakening economy. Surprisingly, the UK PMI surveys for manufacturing and services have been strengthening. The cyclically sensitive passenger car sector has been relatively steady, and the UK job market has been ‘resilient.’ When recessions hit the job market that is when the fur really begins to fly and various knock-on effects spread. Moreover, the financial sector is still stable.
Fine until it’s not… Of course, in recession, everything can be simply fine until it isn’t. The analogy that it is a little like a dam bursting is illustrative. Before it breaks, everything is fine, some may have had a premonition and may have taken action. Then, suddenly it isn’t OK. When the dam breaks, various things are set in motion and those on high ground may be protected – if it is high enough. Who is protected in a recession is always hard to say; it depends on the kind of recession, and its severity and the speed of its onset. The Covid recession, for example, was an extreme event, very sharp, very broad...and very short. But the aftermath of the recession is also a period of ongoing disruption in which repairs are being made. Normalcy does not instantly set in when recession ends. Some recoveries are still painful. For now, The UK economy is showing some unraveling, but it is also still at a measured pace. This could be an inflection point where things either get worse or where this is the worst of it, and conditions settle down. The stable jobs market and stable financial sector are points in favor of this remaining a tempest, that only modestly spills out of the tea pot. But the UK is clearly in a zone where there is merit to close-watching. The Conference Board LEI for the UK has weakened sharply and that also bears watching, however, internationally LEI signals have not been having their finest hour.
Europe| Feb 14 2024EMU GDP Remain Slowed to a Crawl After Revision
There will be no hearts and flowers for GDP growth in the European Monetary Union on Valentine's Day. However, the revisions to GDP have kept the growth rate from turning negative in the fourth quarter (Q/Q measure). The third quarter negative number for Q/Q growth gave rise to concerns that the revision to GDP could take forth quarter growth into negative territory and that would trigger the analysis that the economy had dipped into recession.
Really?
‘Technical’ recession? Ha! You may read articles saying that the economy has avoided ‘technical’ recession. However, I don't know about you, but since very early elementary school I haven't thought of 1 + 1 equaling 2 being ‘technical’ for quite a while. The notion that two consecutive quarters of negative GDP growth are recession is anything but a technical definition of anything. Instead, that is a ‘rule of thumb’ definition of recession. And a rule of thumb is anything but technical, it is ‘one-off,’ ‘on the fly,’ a ‘quick study.’
The notion of two consecutive quarters as a recession I believe has been popularized because it can take the official agencies that designate periods as recessions quite a while to make the call that the economy is in recession. And the notion that two consecutive quarters of negative GDP growth mark a recession is something that's simple and can be known immediately.
On the other hand, taking a rule of thumb like this as something that is literally true obviously has shortcomings. There are also good reasons not to have a knee-jerk fast declaration of recession. European Monetary Union GDP fell by 0.5% at an annual rate in the third quarter of 2023; it's now risen by 0.2% at an annual rate in the fourth quarter. Had it been three tenths of a percentage point weaker (at an annual rate in the fourth quarter) would it really have made that much difference to anything?
I don't think so.
One bullet dodged The U.S. has already, in the post COVID period logged two consecutive quarters of negative GDP growth without having anyone (except a few with a political axe to grind) seriously suggesting that the U.S. economy was in recession during those two quarters. The declines in GDP for the U.S. were modest and at the same time job growth was enormous during those quarters.
What recessions are Recessions are special periods; and, while the extreme economic weakness in the U.S. economy during COVID was barely three months long, that period has been designated a recession. It should not be a poster child for recession dating. The point is that the COVID period was very unusual. The decline in GDP was extremely severe, and it was broad across the economy. However, the period was also extremely short. When recession daters look at recessionary candidate periods, they're looking to find economic activity that has been (1) severely impacted, (2) that has affected the economy broadly, and (3) that has lasted for a sufficiently long period of time to disrupt the economy and earn the designation as a recession. This is why it generally takes recession-dating experts some time before they pull the trigger on calling a period a recession or not. The COVID period is a notable example of a period that was very short and did not fulfill the length criterion but had impacted the breadth and the depth criteria so deeply that it was construed as a recession anyway. The main reason for this is probably the severe increase in the unemployment rate that occurred even though that unemployment rate during recovery came down quite rapidly.
The trappings of recession In Europe, we see none of the trappings of recession. The sense already is that inflation has flared and is starting to come down. We are not left with the opinion that the central bank is going to have to keep pounding interest rates higher until the economy is pulverized. Unemployment rates throughout the European Union remain extremely low and among the the lowest as a group that the Monetary Union has had since it was formed. But there are still a lot of economic risks and things that could go wrong. But the economy simply does not exhibit a lot of the characteristics we would need to see to support the call of recession. Financial distress is mostly absent.
Soft growth and political pressure However, the European economy is in a definite soft spot, a flat spot, and it's underperforming. The proximity of the European Monetary Union to the war in Ukraine is one of the main reasons. And now with more conflict in the Middle East with the Suez channel shuttered, there is another blow that the European economy will have to deal with. Europe, like the U.S., is beginning to creak under the burden of supporting the war in Ukraine. And there has been political backlash from this support in the U.S. in the form of concerns about all the spending that helps people on foreign shores. While in the European Monetary Union, the most immediate recent impact has been on farmers who are concerned about cheap Ukrainian grains in the EMU and the removal of gasoline subsidies to the farm sector that is already under pressure.
Growth data have some positives The table shows both quarter-to-quarter data for the most recent three quarters and year-over-year data for the previous four-quarters. Year-over-year data show only one country’s growth rate observation in Q4 is decelerating compared to the year-over-year growth rate in the third quarter. GDP on a year-over-year basis is not broadly decelerating in the European Monetary Union or across most of its early reporting members- the Netherlands is the lone exception. This is a far more important observation than the fact that 0.2% is a positive number and it's not -0.1%. Similarly, quarter-to-quarter growth shows broader increases in Q2 compared to Q1 and broadly increases in Q4 compared to Q3, while the third quarter shows widespread growth decelerations that appear now be a one-quarter phenomenon- peak weakness was Q3.
The U.S. as bellwether If the U.S. is an indication, the global economy is beginning to pick up. Global PMI data already are showing indications that the service sectors have stopped slowing and the manufacturing sectors - on whatever metrics they have been reporting - are not getting weaker.
Global| Feb 13 2024ZEW Divergence!!
The current macroeconomic situation The assessments of the ZEW experts on current macroeconomic conditions show conditions moving in opposite directions in the United States versus Germany and Europe. In February, U.S. conditions are improving as the economic situation moves up sharply to a reading of 34.0 from the previous reading of 15.3. For Germany, conditions worsen from a January rating of -77.3 to a reading of -81.7 in February. For the euro area, conditions do improve slightly, moving from -59.3 in January to -53.4 in February. However, the chart shows that broadly, conditions in the U.S. are moving up sharply as conditions in Germany and Europe have been deteriorating even with the euro area making a small move toward better conditions in February.
Expectations Expectations in Germany, however, improved slightly, moving up to 19.9 in February from 15.2 in January. In the U.S., there's a small improvement in expectations from -8.3 in January to -6.1 in February.
Rankings for the diffusion metrics In terms of rankings, the queue positioning of the U.S. and Germany on these two important macroeconomic statistics are quite different. The U.S. has an economic situation that ranks in its 51st percentile, above its historic median. Germany’s queue percentile reading is in its 9.6 percentile and the euro area reading is in its 30th percentile for the economic situation. In terms of expectations, the German expectation is higher at its 49th percentile, near its median standing, while U.S. expectations stand at their 40th percentile, still below their median. U.S. economic performance may be strong and trending higher, but expectations are not hitched to that rising star.
Inflation is subdued Inflation expectations are still low everywhere; they weaken in the euro area and in Germany. Expectations for inflation rise slightly in the U.S. to -58.6 in February from -64.6 in January. However, these are diffusion indexes that, in these ranges, don't have a lot of meaning, since the U.S. ranking for inflation expectations is in its lower 5-percentile, for Germany it's in the lower 9.6 percentile, and for the euro area expectations are in their lower 6-percentile. All these are very weak readings for inflation expectations. The ZEW experts continue to believe inflation is under control.
Interest rates For interest rates the readings for both the euro area and the U.S. weakened as in both areas the ZEW experts are looking for easier monetary policy. The readings for long-term interest rates also eased to lower levels as well in the U.S. and Germany. And for the U.S. and the euro area and monetary policy as well as for the U.S. and Germany for longer term interest rates, all the rankings run in their lower 10-percentile, continuing the outlook for low rates.
Portugal| Feb 12 2024Portugal’s Inflation Picks Up and Cools Down
Portugal’s inflation data trends paint a mixed picture if looked at strictly. However, looked at more broadly, it is clear that the minor inflation backtracking is the exception while inflation falling and behaving is the rule.
Portugal’s HICP index in January rose by 0.5% month-to-month after being flat in December and falling 0.3% in November. Portugal’s national CPI also rose relatively sharply on the month, gaining 0.6% month-to-month in January after rising by 0.1% in December and being flat in November. The core rate in the national CPI rose by just 0.2% in January, the same as December, compared to a November performance that was flat month-to-month.
Inflation trends The overall HICP measure shows inflation decelerating despite the month’s jump. Twelve-month inflation is up 2.6%, over six months it rises by 1.9%, and over three months the inflation rate is at a 1.0% rate. The national CPI is more equivocal, rising by 2.3% over 12 months, accelerating to a 2.9% pace over six months, and settling at a 2.8% annual rate over three months. Despite that slight acceleration and stickiness for the headline, the core for the national CPI shows clear deceleration from a 2.4% gain over 12 months, to 1.7% at annual rate over six months, to a 1.4% annual rate over three months. On balance, inflation trends in Portugal seem to be in good shape and not only are the three-month and six-month inflation rates homing in on the ECB's target, but the 12-month inflation rates also are only a stone’s throw from the target set for the euro zone established by the European Central Bank.
Inflation acceleration/deceleration Inflation diffusion in January shows month-to-month inflation across categories accelerating in half of them, the same as in December. Despite the weaker November headline performance, inflation accelerated in 58% of the categories in November.
Looking at inflation acceleration trends sequentially on broader periods, we have a much more satisfying result. Over 12 months inflation accelerates in 25% of the categories, while over six months inflation accelerates in 41.7% of the categories. That's a step up in the proportion accelerating but still less than 50% of them. And over three months, inflation is back to accelerating in only 25% of the categories. All of this is descriptive of an inflation rate that is coming to heel and doing so consistently.
Price declines Looking at the 12 categories in the national CPI rate in January, six of them showed declines in prices month-to-month; that compares to only two that declined month-to-month in December and seven that showed month-to-month declines in November.
The broader sequential data show prices declining over three months in six of the categories; over six months, prices decline in four categories; over 12 months prices decline in only two categories.
It's not that surprising to see fewer price declines over 12 months than over three months because the shorter-term data are intrinsically more volatile. However, there's also a powerful sense of trend here in which inflation is behaving and part of that behavior has prices not just decelerating but declining. Over three months there has been a double-digit decline in prices measured at an annual rate for clothing & footwear. There is a decline of 2.7% at an annual rate for household furnishings and a decline of 2% at an annual rate for transportation as well as a 1.9% drop at an annual rate for recreation & culture. Inflation is falling at a 1.6% annual rate for alcoholic beverages & tobacco.
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