Haver Analytics
Haver Analytics

Economy in Brief: January 2025

    • Price index held in check by modest goods & services price gains.
    • Real spending growth remains firm.
    • Disposable income growth after inflation decelerates.
    • Growth in Q4 was in line with other recent readings.
    • Results bode well for the Fed's inflation fight, but perhaps too soon to declare mission accomplished.
  • In the wake of a meeting by the European Central Bank and release preliminary GDP results for the Monetary Union in 2024-Q4 as well as for key countries, we're now getting some early inflation data that puts policy in conflict with economic data. At the meeting, ECB president Christine Lagarde made it clear that the central bank had cut rates and that it sees inflation on a path to come down to target. In the wake of that meeting, an announcement of GDP data for the Monetary Union showed extreme weakness for the union in the fourth quarter with GDP growth essentially at a standstill and with growth slowing quarter-to-quarter in nearly all of the countries that reported GDP on an early basis. However, the economic data for inflation don't seem to be cooperating.

    Is a bird in the hand really worth two in the bush? Economists say No… There is an old expression that economists seem to turn on its head that expression is this: “a bird in the hand is worth two in the bush.” Translating this into economic data, we have actual economic data, and we also have forecasts for the future. Economists always want to make policy not based on the data in hand but on the forecast for the future (those ‘in the bush’). However, like the hunter who thinks that there are still two in the bush, the ECB, thinking it they can rely on forecasts of inflation may cause it to come home with nothing to eat. However, economic theory is pretty clear that monetary policy works with a lag and therefore it is beneficial to look at forecasts for inflation to make policy today. But that only works if the economist can forecast well, and we know that we can't forecast GDP well or inflation that well and that poses a dilemma for policy.

    Despite the ECB forecast that inflation is coming to path, this is an uncomfortable PPI report released in December. It has the core PPI up by only 0.3% compared to a 0.1% rise in November. The inflation progression moves from 2.8% year-over-year to 2.4% at an annual rate over six months, to 2.7% at an annual rate over three months. That's a relatively mild and not entirely clear pattern toward acceleration. On the month, inflation has broken lower with 10 early reporting European countries all showing an inflation in December with a smaller gain month-to-month than what it showed in November. However, encouraging that might be, November brought sizable gains for a number of these countries where 79% of them saw inflation accelerating in November; a deceleration in December isn't quite as impressive, accounting for that. Moreover, if we look at countries reporting data over 12 months, six months and three months, we see that over 12 months compared to a year-ago inflation is accelerating in all of these countries. For six months compared to 12-months, inflation is accelerating in about 56% of them. For 3-months compared to 6-months, it's accelerating in all of them. Over three months, six of these ten reporting countries are showing annualized PPI inflation in double digits! This does not seem to be something we should take lightly even though the headline increase for the period for the euro area is only 2.7% annualized.

    HICP inflation for January is mixed In addition, HICP data for January has been released on a preliminary basis for three of the larger the monetary union economies: Germany, France, and Spain. In each case, inflation is accelerating over three months to a higher pace than over six months. For Germany, the 3-month pace is 4.4%, for France it's 2.4%, and for Spain it's 7.1%. These accelerations have brought the year-over-year pace for Germany to 2.8%, for France to a still moderate 1.8%, and for Spain to 2.9%. Germany’s ex-energy inflation is still relatively flat at 2.4%, over three months lower than its 2.8% 12-month pace. For Spain corn inflation at 2.1% over 3-months is moderate and lower than its 12-month pace of 2.4%.

    Core inflation is solid, as far as it goes The inflation picture in the core available for two countries is relatively benign, although the inflation rate for the headline for the three early reporting countries is not reassuring. In addition to that, we have PPI data that are showing some very intense pressure on a more widespread basis than we should be comfortable with.

  • Several key themes have been driving financial market fluctuations in recent weeks, including the resilience of the US economy, the policy direction of the new US administration, geopolitical instability, and the productivity potential of AI. The trajectory of central bank policy has also taken centre stage, particularly following this week’s widely expected decisions by the ECB and the BoC to cut their respective policy rates by 25bps, while the Fed opted to leave its policy rate on hold (see chart 1 and 2). Despite the recent wave of optimism pervading financial markets, several factors continue to warrant caution. Chief among them is the uncertainty surrounding the policy direction of the new US administration, which could have far-reaching implications for global growth (chart 3). China's outlook more specifically remains fragile—not only due to potential shifts in US policy but also because of persistent stress in its property sector (chart 4). Additionally, weaker-than-expected economic data from the euro area this week, particularly the flat reading for Q4 GDP, further underscores concerns about the region’s sluggish growth momentum (chart 5). Meanwhile, central banks continue to face a delicate balancing act, as the resilience of the US labour market risks reigniting inflationary pressures, complicating the calibration of monetary policy. Lastly, while artificial intelligence is widely seen as a long-term driver of growth and productivity, growing competitive pressures within the tech sector have recently sparked concerns about the profitability of firms supplying AI infrastructure, highlighting the risks to one of the market’s most celebrated growth narratives. Still, there are bright spots that help offset some of these downside risks. One such example is India’s economy, which continues to show resilience amid incoming data that point to strong domestic demand, sustained investment flows, and policy measures aimed at bolstering growth (chart 3 and 6).

    • Inventory subtraction is largest since Q1’23; net exports add minimally to growth.
    • Consumer spending growth advances sharply; business investment declines.
    • Price index growth picks up marginally.
    • PHSI -5.5% (-5.0% y/y) in December vs. +1.6% (+6.2% y/y) in November.
    • Widespread m/m falls in home sales, w/ the deepest drop in the West (-10.3%).
    • Home sales down y/y in all four regions, w/ the largest decline in the Midwest (-6.9%).
    • Jobless claims maintain narrow range.
    • Total beneficiaries ease after prior week increase.
    • Insured unemployment rate remains low and steady.
  • Growth in the European Monetary Union (EMU) came to a near standstill in the fourth quarter of 2024 as overall annualized growth expanded at a 0.1% annual rate, the smallest measurable rate that would appear on this table. Among the seven early reporting monetary union members in this table, six of them show growth decelerating in the fourth quarter compared to the third quarter. Overall weighted GDP for the monetary union decelerated from 1.6% at an annual rate in the third quarter to 0.1% in the fourth quarter growth. Growth rates were negative for France, Germany, Ireland, and Italy. However, pooling the four largest economies together produces a growth rate of zero in the fourth quarter compared to 1.1% in the third quarter. Spain’s 3.1% fourth quarter growth rate saves the Big-4 aggregate GDP reading from logging a negative number. Away from the four largest economies, the rest of European Monetary Union saw growth plunge lower to 0.4% at an annual rate in the fourth quarter from a 3.2% annual rate gain in the third quarter.

    Growth conditions in the monetary union are poor. Ranking statistics put the performance of GDP growth in context. Only two countries in the table, Portugal, and Spain, have growth rankings above their 50-percentile mark which represents the median for each series over this period. The EMU has a growth rate ranking at its 32.6 percentile; that puts it in the lower third and its queue of ranked data. The four largest Monetary Union economies show a growth ranking in a 28.3 percentile, while the rest of the Monetary Union performs better with the growth ranking in its 40.2 percentile. These statistics compare to the United States that has an above median ranking at its 53.4 percentile over the same period.