Economy in Brief

Inflation has flared across the largest economies of the monetary union. The headline boost is clear. The core or ex-energy gains also are clear but are more moderate; more moderate but nonetheless excessive in September. Largely over the last three months, inflation has been percolating.

The chart shows a clear, abrupt acceleration of inflation in the three largest monetary union economies: Germany, France, and Italy. Twelve-month inflation rates for the top four economies range from 3.3% in Germany to 5.0% in Spain. Over six months, the range is 3.5% (Germany) to 6.2% (Spain). Over three months, the stakes rise sharply, with annualized inflation spurts at a high of 9.1% (Spain) vs. ‘only’ 5.5% (Italy).

Inflation accelerates from a year ago to 12 months, from 12 months to six months, and from six months to three months on all headline comparisons except for Italy from six months to three months. But even on that comparison, the downshift in the pace is minor, and three-month inflation in Italy is still stronger than 12-month inflation. The inflation pressure is rising even if the gains are not monotonic.

Core inflation is high and mostly rising as well. However, core inflation is less prone to have risen over 12 months compared to 12 months ago. On that basis, only Spain’s core inflation has risen. German ex-energy inflation steps down, and Italian core inflation drops off to a below-target 1.5% over 12 months. To restart these comparisons for the three-country inflation ranges on the core or ex-energy measures over one year, we see a range from 1.5% to 3.1%. Over six months, inflation accelerates for all three, but the low end sees Italian inflation only up to a 1.6% pace, whereas the high end at 3% is Spain. However, Spain’s strong gain marks a deceleration from its 12-month pace. Over three months, inflation kicks up its heels across the core and ex-energy measures, from a low of 2.4% in Italy to a high of 3.6% in Spain. And core inflation accelerates in all three countries over three months.

Core inflation has been slower to rise, but once it rises it tends to be more stubborn. The global push toward higher inflation is still in gear as oil prices are lingering high. Stock markets have been trying to weather the storm of high inflation and an uncertain future. All eyes are turning to the winter season even though it is only fall. Winter is cropping up to be a difficult one for Europe, with low energy stockpiles as the season approaches. There is a lot to worry about and very little we can be sure of. As aspects of the future draw nearer, we’re gaining focus on what matters, and what matters and what is under control are, increasingly, two different things.

The EU Commission indexes weakened in September, with the overall index falling to 97.9 from 98.4 in August; however, the month's level is still stronger than recent readings prior to August (the strongest since February, excluding August). The index ranks at its 31.9 percentile on data since 1985, marking the month as below its median by a good margin. The median observation on data presented as a percentile ranking occurs at a ranking of 50%.

Monthly sector readings and perspectives The industrial reading improved month-to-month to -4 in September from -5 in August. The rise on the month lifts it just above its historic mean, and above its historic median, with a 54th percentile ranking. Consumer confidence slipped on the month to -16.5 from -15.5 in August. The consumer reading is substantially below its historic mean, which occurs at a reading of -9. The ranking for consumer confidence on the month is in its 12.4 percentile, an extremely weak reading. It has been this way for consumer confidence for some time. Even in the United States, where the economy is doing much better, readings on various consumer surveys have been exceptionally weak. The retailing assessment was unchanged at -6 in September; a reading of -6 is above its historic mean, which occurs at a value of -8. The month’s level also leaves retailing above its historic median at a standing of 56.6%. Construction was also unchanged at -5 in September; construction has been steady at -5 for a number of months in a row. Its historic mean is -15, and the -5 reading this month leaves construction at a 68.6 percentile, a quite firm level despite the negative diffusion reading. Services were also unchanged in the month at +6. Services have gotten slightly stronger in recent months. The historic mean for services is +6, so the sector is at its mean, but it is below its median, with a 39.4 percentile ranking.

Most country readings show gains on the month The reading for the overall EMU level declined in September, falling by 0.5%. In addition, seven reporting countries issued negative readings in September. Two of those countries, France and Italy, are among the four largest monetary union economies. However, the other two large EMU economies, Germany and Spain, marked improvements, with Germany rising 0.6% month-to-month in September and Spain rising 3.3% after a 2.1% decline in August.

Rankings remain overwhelmingly weak Looking at the rankings by country, among the 18 reporting countries only seven have country-specific ratings above their historic medians. Among the four largest EMU economies, only Spain is above its historic median with a 68.2 percentile ranking. Germany has a 29.6 percentile ranking, France is in its 36.9 percentile, and Italy is in its 44.8 percentile. The strongest reporting countries are small countries, with Greece posting a 73rd percentile ranking and Lithuania a 71.7 percentile ranking, followed by Spain’s 68.2 percentile ranking as the next highest reading.

Industry is back...for now It's good to see the industrial sector back up at a reading above its historic median and to be joined by retailing and construction. Retailing is a particularly rewarding sector to see performing well because consumer confidence is performing so poorly, with a 12.4 percentile standing. However, the services sector continues to lag with a 39.4 percentile standing, and that could be a problem because that's the job-creating sector for most economic units, and it's certainly true of the monetary union.

The job front On the job front, industrial employment and construction employment sectors report above 50th percentile standings in their monthly responses. With the employment in construction at a 71st percentile reading and for industry at a 68th percentile reading, we have some good news. However, for services, the employment reading is only at the 37th percentile, and that is the sector most responsible for delivering employment opportunities. Under consumer confidence, unemployment expectations have a 64.6 percentile standing, nearly a top one-third reading on that gauge. The U.S. economy is doing much better than the European economy; yet, there too, consumer confidence readings are weak, very weak. But the U.S. economy is growing strongly, and Europe continues to grow as well; a lack of confidence so far has not been an impediment to growth. As we can see so far this month, the manufacturing sector, the industrial sector, seems to be doing relatively better; however, everything is at risk due to events in the Middle East. Conditions in the Strait of Hormuz and what happens to oil prices are critical to what happens next. In addition, there's a great deal of concern about Europe and its low stocks of heating oil as winter approaches. The monthly readings from the EU indexes showed a step back on the month, but that was after the sharp improvement a month ago. In general, the European economy is doing a little bit better, with sectors in an upswing more so than they had previously, but conditions remain substantially touch-and-go, dependent on unforeseeable events.

Confidence across business sectors and consumers stepped back slightly in September in Finland. However, the overwhelming trend result is that business sector confidence is on an upswing; consumer confidence has undergone some slight weakening to its trend recently, led by some deterioration in its macro-indicator.

The monthly setbacks in September were relatively small, while the changes in confidence show improvement in the averages over three months compared to six months for all the sectors except retailing where the step-back is a single point to an average of 20 over three months from an average of 21 over six months. However, the retail sector is an exception and also shows a substantial step-down in September compared to August to a level that is going to point to a further deterioration in the moving averages ahead. But that phenomenon seems to be limited to retailing.

Manufacturing confidence holds steady with low single-digit positive readings over three months, six months, and 12 months. The September level has a 75.1 percentile standing, which is quite solid. Sector readings generally display this same phenomenon; construction is an exception as its headline readings are negative; however, they're improving more substantially. The retailing readings have been improving from 12 months to three months, based on the averages, until the recent drop-off in September.

The consumer sector shows consistently mild negative readings, and they have decayed slightly. The consumer sector is the only one with a current queue standing that ranks data back to 2007 below its historic median, meaning below a ranking of 50%. The consumer sector ranking in September is at 48.1%, marginally below its median. The other sectors have rankings generally in their mid-70th percentile, with the exception being construction, which has a 69.3 percentile standing. All of those are quite solid.

Finland’s business sector and consumer rankings as well as their within-sector readings are, for the most part, firm. The line item for the order book level in construction has a below-median standing in September; however, that reading has been improving smartly from 12 months to six months to three months. Expected sales in services register a 49.2 percentile standing, below their median; that reading has been dead solid at 15 over 12 months, six months, and three months.

The consumer sector shows some of the weakest readings (not shown here). Some of that traces to expected high consumer price inflation that has an 81.9 percentile standing in the consumer survey. While the overall threat to unemployment in that survey is above median at a 56th percentile standing, that generic overall concern does not translate into individual concerns as a separate reading on the personal threat to unemployment is quite low at a 17th percentile standing.

On the whole, the business and consumer readings for Finland are good and for the most part quite solid, with the need to keep an eye on the responses in retailing and perhaps also in the consumer sector, largely because of what appears to be the impact of inflation on the consumer psyche.

In this week's Letter, we explore US-China dynamics and their implications for Asia following last week's summit in Washington, alongside other pertinent issues for the region. The summit was long on diplomacy but short on tangible economic outcomes, with the fragile trade truce extended by just two months. Asia's trade orientation, meanwhile, has shifted from the US towards China since the turn of the millennium (chart 1). Some economies, Taiwan among them, have since tilted back towards the US partly on AI-related trade. Bilaterally, the narrowing of the US goods deficit with China seen last year has stalled and even reversed slightly this year, alongside easing effective US tariffs (chart 2). Further easing may follow, with tariff relief recommended on $30bn of goods in each direction. China, for its part, has more than replaced lost US export revenue with sales to the ASEAN-6 and India, keeping export growth robust while domestic demand flounders (chart 3). AI was the summit's other key theme. The two sides agreed to set up a Super Intelligence Dialogue and an incident communication channel, a timely step after the Hugging Face incident sharpened calls for a slowdown in AI development (chart 4). In the US, AI is the leading reason cited for job cuts this year, though broad displacement has arguably yet to emerge (chart 5). So far, the change lies more in how people work. Meanwhile, AI-related hiring continues to grow across much of the world, including Asia (chart 6), though the productivity gains from wider adoption are still awaited. Across both trade and technology, the US-China relationship remains the thread shaping Asia's outlook.

Asia’s trade situation The US-China summit in Washington concluded last week, with mutual diplomacy on full display, including China sending a pair of giant pandas to the US. Tangible economic outcomes, however, were few. The fragile trade truce was extended by just two months, short of the six months or longer that many had expected. Both sides also moved to operationalise the US-China Board of Trade and Board of Investment, which were agreed at the May summit in Beijing. Asia's trade picture continues to evolve nonetheless (chart 1). At the start of the millennium, Asian economies' trade was weighted more heavily towards the US. Over the following decades, their ties with China grew steadily closer. Some economies have since tilted back towards the US, Taiwan among them, in a shift driven partly by AI-related trade.

Globally, money growth is easing but the U.S. has become an exception to global trends.

In the EMU, money growth has been slowing within the last year as 12-month growth at 4.3% turns to 2.8% over six months and to 2.4% over three months. In addition, speaking more broadly, the three-month and six-month growth rates are slower than the cumulative pace over three years and two years.

The performance of credit growth in the EMU runs along very similar lines, with greater easing within the 12-month span and growth being broadly weaker over three months and six months than over the last two years and three years cumulatively.

EMU money growth in real terms—real money balances—show not just slower growth but contraction over both three months and six months. They show a broad slowing, with some irregularity compared to longer periods.

The U.K. is not a clear read on money trends, but its three-month nominal growth rate is weaker although there is a small pickup over 12 months and six months compared to previous periods. U.K. real money balances also show contraction over three months but have speeded up over six months and 12 months from very weak rates of growth in their performance in earlier periods.

Japan shows clear slowing in nominal growth from 12 months on. Its recent growth rates are slower than its already slow rates over two years and three years. Japan’s real balance growth also shows real balance contraction over three months and six months as well as more broadly.

The U.S. is an outlier, with slightly weaker three-month nominal growth but with accelerations over 12 months and six months, and with three-month growth that is stronger than over the longer horizons of two years and three years. Growth in real money balances in the U.S. has accelerated and is accelerating within the last year and over the longer horizon as well. U.S. real balance performance shows monetary stimulus running flat-out, marking the U.S. as a clear monetary outlier.

While tracking and relying on monetary signals has fallen “out of fashion,” a lot of that is because of monetary innovation. It is not clear that the finding that U.S. real balances are accelerating should be treated as a benign event. Money growth in the U.S. is strong in real and nominal terms.