Economy in Brief: June 2022

China's economy has been under pressure. Its approach for attacking COVID known as zero COVID has implemented rolling lockdowns across the country that have interfered with manufacturing and economic activity as COVID itself has proved to be extremely hard to eradicate. The rest of the world has decided that it will live with COVID since COVID turns out to be not as lethal as once thought nor for the most part as debilitating. But China's different approach means that a portion of the world economy is at risk to COVID and that supply chain interruptions from the disease are still possible as well as a setback to global aggregate demand as China's own demand wanes under the strain of lockdowns.

China, however, now shows signs of being able to emerge from some of its difficulties. It hasn't changed its zero COVID policy at least not formally, but there appears to be some ability of the economy to find some footing. China has implemented some targeted lockdowns that have locked down smaller more precise areas- a less ham-handed approach.

In June, the manufacturing PMI index has moved up to 50.2 from May's 49.6. The manufacturing sector is now showing expansion (its strongest since February). In fact, the sector's average reading over 12 months is below 50 so it has been indicating a depressed or barley growing manufacturing sector for quite some time. Nonmanufacturing has jumped very sharply in June. It has reached a value of 54.7 on its diffusion index in June, up from 47.8 in May. Looking at the chart, you can see how sharp this jump appears. The nonmanufacturing index was at a reading of 41.9 just two months ago so nonmanufacturing is making great strides. And this is the part of the economy that tends to be the most harmed by COVID lockdowns. Manufacturers have found ways to run their businesses and even to keep people in the factories living and working in the factories while they are under their lockdown orders. Some factories can continue to operate under lockdown orders. But service sector businesses are businesses that are out in the open, out in the economy, out in that area that gets locked down. When a lockdown occurs, a worker can't get to that business and consumers can't get there either. Service sector businesses simply get locked down too.

The one month rebound in nonmanufacturing is the second largest one month rebound in that index in the last 15 years. It's a very significant jump. The two-month jump, which is also the second largest on record, is the largest increase after COVID struck China.

The manufacturing and nonmanufacturing sectors are showing significant improvements. Whether they continue to do this will depend a lot on what happens with COVID and attitudes toward it in the days ahead.

Money supply trends show that slowing is widespread across the major monetary center countries. In the European Monetary Area, for example, M2 growth logs 6.2% growth over 12-months, grows at a pace of 5.6% annualized over 6-months and by 3.4%, annualized, over 3- months - a clear deceleration in nominal money growth is in progress.

In the United States, the slowdown is much more dramatic, with the 12-month growth rate for M2 at 6.5%, slowing to a pace of 3.9% over 6-months, and to a skinny 0.1% pace over 3-months. In the UK money growth is at 5.4% over 12-months; it ticks slightly higher to 5.6% over 6- months then slows to 4.8% pace over 3-months. In Japan where inflation has been much less of an issue overall money supply statistics are much steadier and the growth rates of money are lower… Japanese growth show M2 plus CD's up at a 3.2% annual rate over 6-months, that becomes slightly stronger at a 3.6% pace over 6-months and then backs down to the 12-month pace again at 3.2% over 3-months.

Real balance growth is contractionary The growth rates cited above are nominal money growth rates. They are the same as the statistics that are plotted in the chart that accompanies this article. However, we can also calculate ‘real money balances’ which reflect the local currency value of money deflated for the effects of inflation and then we can calculate growth in these ‘real balances’ after inflation effects are accounted for.

In the European Monetary Area real money balances grow at a - 1.7% annual rate over 12-months, at a - 4.4% annual rate over 6-months, and at a -7.6% annual rate over 3-months. This is a progressive contraction that is not good for growth. Of course, The ECB is trying to slow the economy down and even in the European Monetary Area where official interest rates have not yet begun to rise, the impact on money supply growth – especially on real balances- is quite clear.

In the United States over 12-months real money balances (RMB) contract by 1.8%, over 6-months RMB contract at a 5.1% annual rate and over 3-months it contracts and a 9.6% annual rate. This is very rapid shrinkage in the real money stock.

In the UK. Real money balances fall at a 2.6% annual rate over 12-months, at a 6% pace over 6-months and then they contract at an 8.5% rate over 3-months. The UK pattern of contraction in real balances is also severe.

The more severe the contract of real money balances the greater will be the risk of recession and the less likely a soft landing will be generated…

In Japan real money balances grow by 0.7% over 12-months, they grow by 0.2% over 6-months but then they contracted a 0.8% annualized rate over 3-months. Japan is just starting to experience some monetary contraction over the last three months.

Credit trends in EMU In the European Monetary Area, we can also look at the impact inflation has had on lending as well. In nominal terms lending continues to accelerate as credit to residents grows at a 4.8% pace over 12-months, at a 6.2% annual rate over 6-months and at a 6.3% annual rate over 3- months. If we convert these to real terms, credit to residents is falling by 3% over 12-months, it's falling at a 3.8% annual rate over 6-months and it's falling at a 5% annual rate over 3-months.

Credit to residence is drying up as well and credit is one of the channels through which monetary policy is going to slow economic growth. Since businesses need to invest and pay for inputs and services in real terms the real balance trends are most important. Of course, firms will pay a nominal, dollar, pound, euro, or yen price, but that ‘nominal’ price is going reflect the inflation rate. By deflating the credit stock numbers for inflation, we get a sense of how much liquidity is available for firms to use in an inflationary economic environment. This is true for the credit data in each country, but we only present EMU data here.

The second measure of credit in the European Monetary Union is private credit. Private credit is growing at a 5.3% pace over 12-months, at a 6.5% annual rate over 6-months and at a 6.7% annual rate over three months. Nominal credit shows some acceleration. But, once again, converted to real balance terms, private credit growth is contracting by 2.6% over 12-months, it's contracting at a 3.6% annual rate over 6-months and it's contracting at a 4.7% annual rate over 3-months.

Inflation in the euro area continues to be relatively strong. Nominal interest rates have risen as the markets are bracing for policy changes by the ECB itself and those are still to be forthcoming. However, the impact on liquidity and on credit provision clearly have been contractionary for some time in fact in the euro area credit to residence is shrinking at a 1.5% annual rate over two years and private credit is shrinking at a 1.2% annual rate also over two years. That longer term shrinkage is created by the rise of inflation rather than by specific credit tightening actions by the Monetary Authority.

The global outlook continues to be for slowing. The IMF has recently reduced its forecasts and central bankers continue to talk about slowing inflation and avoiding recession as though it's possible. Such things are possible in the world of theoretical economics, but in the real world in which we live, significant inflation has never been slowed by anything other than a recession. So, if central bankers try to promise that there's a way to balance the needed austerity with the desire for growth, be sure to listen carefully to exactly what they're saying. Are they promising results, or speaking hypothetically or hyperbolically?

French confidence is weak in June 2022. The value for June at 82.2 is lower than its 85.4 rating in May. The confidence indicator has been slipping since at least February. Late in February Russia, after a prolonged period of tension, invaded Ukraine and after that invasion the French confidence measure weakened sharply dropping from 96.7 in February to 89.6 in March and then continuing to drop.

French household confidence has a percentile standing in its queue of data since 2001 in the lower 3.5% of its historic queue of data. That means confidence has been this lower or lower only 3.5% of the time over the last 20 or so years- that's an extremely depressed reading.

Living standards for the past 12 months fell in June to -75 from -68 in May; this series has been somewhat slower to fall, but of course it's the backward-looking series of the last 12-months and it's about actual living standards not about expectations. As such, it is benchmarked to how the economy has been performing. Still, this index has fallen to a weak 8.2 percentile standing, another extremely low reading.

The forward-looking assessment of living standards shows a much more immediate and sharper reaction to the invasion as it has a -34 reading in February then it dropped to -61 in March. The June reading, at -69, reflects a 0.4 percentile standing and an extremely weak reading.

Despite the clear deterioration in expected living standards, unemployment for the next 12 months has not been greatly affected. This is somewhat surprising. The reading for unemployment was -2 in February, it improved slightly to +7 in March and since had a reading of +8 in June 2022. Its percentile standing is still weak, in the lower 17.9 percentile of its historic queue of data, but not as dramatically week as for living standards or for the overall confidence indicator. What is odder is that it has improved from its February reading.

Price developments show that inflation has been creeping up and is expected to continue to move up. In February, the assessment of past developments over the previous 12 months stood at 46; that was not changed very much as of March. However, by June that assessment had moved up to a reading of 60. Price developments are expected to generate pressure over the next 12 months as well. They were at a reading of -14 in February 2022; that moved up extremely sharply in March to a reading of +39. However, the reading has migrated back down to a level of +23 in April and to +10 in May, then to +4 in June. The current reading is still extremely high as both past and expected inflation developments have 97 percentile standings in their respective historic use of data. The expectation for future inflation is relatively high in rank but not as absolutely high as it was in terms of the level of the reading.

Assessments for savings are generally more upbeat. The assessment of the favorability to save was 31 in February and had slipped to 23 in June. The ability to save over the next 12 months looking ahead once had a reading of 12 in February, but that had slipped to -1 in June. The favorability for savings has a 72-percentile standing whereas the ability to save for the next 12 months has a higher 81.3 percentile standing. The savings assessments continue to be relatively strong.

The spending environment for making major purchases has been hit quite hard. In February, the assessment was at a -17, that deteriorated to a -22 in March and that continued to slip. By June, the reading had fallen to -35. That -35 reading has a 3.1 percentile standing in the historic data back to the year 2001, marking it as an extremely weak reading. Clearly French consumers are concerned about the war, they're concerned about the ECB’s ability to fight inflation, and all of this is having a detrimental impact on their willingness to spend.

The financial situation looking backward was assessed at -20 in February; it slipped slightly in March and continued to deteriorate. It now stands at a -30 reading in June. The financial situation looking ahead to the next 12 months had been a -6 back in February. It slipped sharply to a -22 reading in March and currently sits at a -24 reading. Those survey assessments show the financial situation for the past twelve months had a 15-percentile standing and for the next 12 months it has a 4.7 percentile standing – more extremely weak standings.

The timing of the deterioration in the French survey quite clearly connects it with Russia's invasion of Ukraine. The current assessments remain very low reflecting the risk from inflation and war as well as the ECB prepares for fighting inflation in the euro area.

Conditions are weak the overall household indicator. Confidence is 22 points lower than it was before COVID struck in January 2020. Expected living standards are 42 points lower than they were before COVID struck. Past inflation developments are 93 points higher than they were before COVID struck although price developments for the next 12 months are only 28.8 points higher than they were before COVID struck. The spending environment is 28-points weaker than it was before COVID struck and the financial situation looking backward is worse by 15-points than it was before COVID struck although the forward-looking financial situation assessment is even weaker, nearly 22-points lower compared to where it was before COVID struck.