Economy in Brief: 2023

Monthly money and credit developments in July hinted at a possible reversal in the ongoing global declines in money and credit trends one month ago. However, in August the data for money and credit in the European Monetary Union (EMU), as well as money supply data from the U.S. and the U.K., show that the declines in money on the month are back in force. Only Japan shows an increase in money supply in August and that's not surprising since Japan has a legacy of positive money growth rates unlike other major monetary centers in this table.

EMU conditions Nominal growth- The European Monetary Union shows negative money supply growth in both July and August as well as over 12 months, six months, and three months. Money supply trends are flat with growth declining mostly at about a 2% pace or a little more over the three-, six-, and 12-month intervals. Credit growth in the EMU remains weak and registers tiny growth rates over 12 months compared to negative growth rates of about -1% over both three- and six-month horizons for overall credit and private credit.

Real growth- Inflation-adjusted growth rates for credit and money in the EMU show a table full of negative numbers. The steepest negative growth rate is over 12 months at minus 7% for M2, that gives way to -5.7% over six months and then steps back up to minus 6.8% over three months. So, we're not able to say that the decline in real balances is tapering off in the monetary union. Credit to residents has its steepest sequential growth rate over three months at -5.9%, compared to -4.9% over 12 months. Private credit posts nearly identical growth numbers to total credit as well as nearly identical trends. Money and credit in the EMU, looked at sequentially, looked at in nominal terms or looked at in real terms, show significant ongoing weakness and possibly stepped-up weakening.

Price trends in the early reporting European Monetary Union countries show a mixed bag of results for the PPI. In August, we have six countries listed in the table of which five are monetary union members. Only two show PPI declines in August. Germany shows a decline of 0.1% and Denmark, a member of the economic union, not of the monetary union, shows a decline of 1.1%. In August, the consumer price index core HICP gains 0.3%, building on a 0.5% gain from July. The early inflation data from the monetary union suggest that the pace of the inflation decline is shifting and slowing.

Tail wind becomes head wind- Some of this pressure undoubtedly stems from Brent oil prices that rose by 6.1% in August and by 6.3% in July, both are month-to-month gains. Brent oil prices are up at a 56.8% annual rate over three months and a 3.5% annual rate over six months, compared to dropping by 12.7% year-over-year. Energy prices are no longer a tailwind for falling inflation in the monetary union.

Hints on core inflation- While the consumer price core measure shows increases in each of the last two months, for Germany at least, the ex-energy PPI gauge shows a 0.3% decline in August and a 0.4% decline in July. The German PPI excluding energy is showing a faster deceleration as it rises 1.4% year-over-year, falls at a 2.3% annual rate over six months and then falls at a 3.3% annual rate over three months.

Oil impacts the PPI and CPI- Inflation trends are somewhat confused and complicated, which is not surprising after having seen such a burst of inflation and then an unwinding of oil prices. Now, as oil prices begin to firm and rise, we're going to see an upside to headline inflation; it's unclear exactly how core inflation is going to navigate in this environment. We would expect core producer price inflation to be somewhat more sensitive to price pressures from oil and consumer prices to be less sensitive to energy pressures. But when we look at some, admittedly limited, core readings, what we're seeing in August for Germany are core prices ex energy continuing to fall while the HICP for the EMU, excluding tobacco food & energy, is rising, and slightly accelerating over three months compared to six-months.

Inflation trends- Central banks tend to focus on year-over-year inflation rates and for the monetary union we're looking at PPI prices that are declining sharply over this group of countries although for Germany the core ex-energy is up by 1.4% and, of course, the ECB is looking at consumer prices union-wide. There we see the core is up at a 5.3% annual rate, decelerating only to a 4.8% annual rate over six months and then ticking back up to a 4.9% annual rate over three months. Oil prices are wreaking havoc with these trends. Producer prices generate massive declines in inflation over 12 months and over six months; then, there are scattered results over three months as oil prices begin to turn and as the lags apparently work through different countries at different speeds. Over three months PPI prices are falling at a double-digit rate (or at least nearly so) in Germany, Denmark, and Ireland. Over three months producer prices are rising at a 3.3% annual rate in Finland, at a 6.3% annual rate in Spain, and at a 7.7% annual rate in Portugal.