Economy in Brief

The total PMIs from S&P improved in August, with only eight of the reporting jurisdictions showing month-to-month backtracking. Only seven of the reporters in the table show readings below 50, indicating a contraction of output in the reporting country or unit.

The average and median readings for the full table show improvements, by and large, month to month in the total PMI readings. The sequential progression is more complicated, with a weakening in pace over six months and an improvement over three months compared to six months.

France, Ghana, Egypt, and Qatar show persistent levels of activity below a diffusion value of 50, indicating ongoing contraction over three months, six months, and 12 months, in addition to recent monthly readings that remain below 50 (except for Ghana in the latter case).

Nine of these 25 regions have percentile standings, depicted in the far right-hand column, below the 50% mark. These represent rankings of the August values among all observations back to January 2021. Readings below 50% indicate values below their respective medians on this timeline. So, 9 of 25 countries or reporting units as of August are showing readings that are below what they produced as a median over the previous approximately 4½ years. Among some of the larger countries, this includes France, the BRIC member Brazil, and Hong Kong, which has traditionally been a strong-performing unit when it was the British Crown Colony of Hong Kong.

Over three months, only five of the reporting areas have weakened compared to their averages over six months, and only seven of the reporting units show contraction over three months.

Norwegian industrial production surged in June, rising 7.6% month-to-month after falling by 0.9% month-to-month in May. The gain was lifted by utilities output and by a screamingly strong increase in mining & quarrying output. Output in manufacturing fell by 1%, in sharp contrast.

A bifurcated economy: Sequentially overall output is rising by 8.2% year-over-year and at a 32% annual rate over the last three months. Both utilities & mining are showing output up at a fantastically strong pace over the most recent three months, driving overall industrial production up at an extremely strong pace. However, for the same three-month period, manufacturing output has been weak, falling at a 3.7% annual rate while rising only 0.7% over 12 months.

Moderate to weak manufacturing: In June, manufacturing output fell by 1%, with consumer goods output falling by 1.5%, intermediate goods output rising by 3.6%, and capital goods output falling by 1.5%. Sequentially, the main manufacturing sectors are all showing tempered rates of increases. The lone exception is intermediate goods where there is an acceleration underway, with output rising 1.3% over 12 months, at a 4% annual rate over six months, and at a 6.5% annual rate over three months. Capital goods output is weak, falling at an 8.6% annual rate over three months. Consumer goods output is falling at a 0.4% annual rate over three months, led by a sharp decline in consumer durables, which are falling at a 29% annual rate over three months. The Norwegian economy is undergoing substantial crosscurrents in manufacturing. Manufacturing is feeling some amount of duress while a boom is going on in utilities and mining & quarrying.

Over this period, inflation in Norway has been extremely well tempered, with the HICP for June falling by 0.4% and the core HICP falling by 0.2%. Headline inflation is decelerating from a 2.6% pace over 12 months to 2.2% over six months, and it is falling at a 0.8% annual rate over three months. Core inflation is even well-behaved, rising 2.8% at an annual rate over 12 months and six months, and then rising at only a 1.6% annual rate over three months. Despite the strong growth in Norwegian output, there's no sign of overheating since the manufacturing sector is weak and the strength is lodged in mining & quarrying and utilities. The inflation environment remains tempered. Norwegian manufacturing output shows that all sectors have recovered beyond their 2020 pre-COVID levels except consumer durables. Durables output is still 12% below the output levels that had prevailed in January 2020; the rest of the sectors are showing, for the most part, reasonable increases in output over that period of time, ranging from moderate to quite strong—strong in the case of utilities and mining. Capital goods output is also up 21% from its January 2020 level. The Norwegian economy is experiencing some mixed patterns.

In the quarter to date, which is now the complete second quarter, overall output grew by 6.4% at an annual rate, with manufacturing growing at a modest 2.6% annual rate. Consumer goods output grew at a 2.6% annual rate, intermediate goods output grew at a 5.4% annual rate, and capital goods output grew at a skinny 0.1% annual rate. In the quarter, inflation rose at a 0.9% pace, with the core HICP up at a 2.8% annual rate. Obviously, as this quarter was ending, conditions have progressed differently as we're now looking at extreme strength in overall industrial production, declines in manufacturing, and moderation of inflation. These trends will have to be watched closely as things are changing in Norway.

There's a good deal of concern about the development of inflation globally and across individual areas where central banks are making decisions on what to do with policy. In the euro area in August, the headline rate rose by 0.4%, with the core rising by just 0.2%. The three-month inflation rate for headline HICP inflation is 3.3% annualized while the pace for the core is only 2.4% annualized. That's excessive relative to the 2% target but not a particularly strong acceleration for inflation. It's not the kind of number that says to the ECB that it has to raise rates right now.

Sequentially, the headline rate goes from 3.3% to 4.3% to 3.3% over 12 months, six months, and three months on an annualized basis. These are all too high and too uncomfortable, topping 3% and in one case topping 4%. These are the kinds of numbers that require some kind of remedy. However, core inflation posts a very different set of numbers that go from 2.4% to 2.5% to 2.4% over 12 months, six months, and three months, again all annualized. These numbers show inflation skimming too high over the target but not even half a percentage point too high. It’s the kind of thing that a central bank might be willing to continue to tolerate for a while. There's nothing about a 2% target that says 2.4% is an outrageous miss and requires a monetary policy remedy. On the other hand, the fact that that's happening and the headline rate is cruising at a much higher pace over the top of the target may be something that will cause the central bank to say, well, core inflation is too high and I'm also concerned that headline inflation is going to pull it even higher, so maybe it is time to act. These sorts of considerations will keep the market a little bit off balance and wondering what the ECB is going to do.

The Big Four economies in the monetary union all have year-over-year inflation rates for the headline that are excessive compared to the target set for the entire community. France has the lowest 12-month headline pace at 2.7%. Spain has the highest at 4.5%. Over three months, both France and Italy run headline inflation near a pace of 1.5%, while German inflation runs hot at 3.7% and Spanish inflation sizzles at a 7.0% pace.

Once again, however, core is a better-behaved series, at a 12-month pace of 2.9% for Spain, 1.4% for Italy, and with German ex-energy inflation up at a 12-month pace of 2.2%. Over three months, the ex-energy or core paces run at 0.4% for Italy, 2.0% for Germany, and 2.6% for Spain.

Bottom line European inflation is too high. The inflation rate in the community appears to be irregular, just judging by the Big Four countries and all their variation. Core inflation is mostly contained, but the headline is not. Still, core inflation is running mildly hot. It is decision time for the ECB. The safe course would seem to hike rates again to be sure. But nothing here is clear. Stay tuned.