Economy in Brief: October 2022

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.

Among the 11 early reporters of the PPI (or in the case of Austria, the wholesale price index), the median increase in September was a rise of 0.2%. This is a downshift from the 3.6% increase in August but an improvement from the 0.2% decline in July. Europe is clearly in a period where prices are somewhat volatile in the wake of some energy price and commodity price instability.

However, the overall median for 12-months, 6-month, and 3-month price changes for the PPI excluding construction among EMU members shows a deceleration in the pace from 35.6% over 12 months to 25.6% over six months to 20.8% over three months. This is some significant deceleration; however, the pace of inflation is still tremendously high.

The results in the table are for September 2022. They show an increase of 35.6%. One year ago, the year-on-year increase was 17.4%. The year before that, the 12-month period ended September 2020 had the year-over-year PPI median fall by 3.2 percentage points.

The PPI is most volatile of the 'major' inflation statistics because it's weighted toward commodities and oil, goods that have been bearing the brunt of the inflation process recently. In the table, Ireland shows some of the most outrageous increases for the PPI over three months, six months, and 12 months. Setting its wild numbers aside, Germany has the highest percent gain over three months at 84.6%. Over six months, again, Germany posts the largest gain at 53.5%. But over 12 months the largest annual gain is from Italy at 53.2%, followed by Belgium at 49.5%, and then Germany at 46.9%. On the same profile, the weakest increase over three months is from Austria at -8.9%; over six months there's a decline of 6.1% in Greece; over 12 months there's much more clustering but the weakest gain is from Austria at 20.6% followed by Portugal at 21.6% and Finland at 24.6%.

The PPI for 12-months ago - its 12-month increase for the period ended in September 2021 - shows a median gain of 17.4%. However, clustered around that median gain, the lowest increase in the table is France at 11.9%, stepping up to Germany at 13.4% and Portugal at 15.5%. At the top end, the biggest gainers are Ireland's 82%, a 25.6% increase in Belgium and a 23.9% increase in Spain.

Inflation shows some significant variability but clearly the pace has been high and one of the key reasons has been oil prices.

We have two early observations on a PPI excluding energy; one comes from Germany and the other is the number from the U.K. (which is no longer an EU member). The U.K. number is a core number excluding food, tobacco, beverages, and petrol. Both the German and the U.K. figures increase by 0.5% in September and by 0.4% in August. They diverge in July with a 0.4% increase in Germany and a 1.3% increase in the U.K. Sequential data show a tendency for the ex-energy or core inflation rates to abate but the progression is not absolute. In Germany and the ex-energy pace for inflation goes from 13.8% over 12 months up to a pace of 15% over six months then down sharply with a 3.8% pace over three months. In the U.K., the core rate goes from a 16.4% increase over 12 months up to 18.9% pace over six months and then down to a pace of 12.2% over three months. In both cases, the three-month pace is sharply lower than either the six-month or the 12-month pace.

The ex-energy or core inflation reported by Germany and the U.K. show an annual rate pace that hovers around the 15% area more or less and that is considerably better than the median, 35.6% annual rate, for all the countries in September.