Economy in Brief

In March, the overall EU Commission index of activity in the EMU rose to 96.3 from 95.5 in February, posting its strongest value since December. March saw gains (or no change) in all five major indexes, a change from February when three of the five sector indexes fell. Also in February, 11 member countries showed declines in sentiment month-to-month compared to only 5 member countries showing declines in their March indexes. The breadth of month-to-month performance improvement in March is more impressive than where the gains have taken the various country or sector indexes compared to historic values.

Around mid-2020, Italy emerged as having the strongest reading among the four largest economies in the monetary union. Conversely, Germany, beginning around mid-2023, began to lag and has consistently been the weakest economy among the major 4 since that time.

Game of Growth: Winter is not coming...it’s just still here German consumer climate edges higher in April. It is still the 15th weakest monthly reading in the last 24-plus years (292 months) of its survey existence. The reading ranks in the lower five-percentile (5.3 percentile) of all readings in the history of survey and is still exceptionally weak. If this is a climate reading, it is still winter in Germany.

Learning from Germany’s Climate History Readings on this measure were largely positive back to 2000 when the survey began. It logged a series of negative readings (15 months of negative readings) from March 2002 through May 2003; those readings never got weaker than a reading of -3.5.

Covid brought the next set of negative readings to GfK from May 2020 to September 2021. There were 17 negative months in a row that began with the deep negative reading at -23.1 in May. It repaired to -18.6 in June, progressed to -9.4 in July and rose to a reading of just -0.2 in August 2020, before slipping back into weaker readings as weak as -12 to -15 or so. Negative readings returned in December 2021 before the Ukraine invasion which came in February 2022. GfK did not nosedive immediately, but it weakened from -6.9 in Jan-Feb to -8.5 in March 2022, and then fell to -15.7 in April. The bottom fell out as the index plunged to -26.6 in May 2022.

Since May 2022, the GfK reading has averages -30.2. On this truncated timeline, the current reading ranks as the eighth strongest. On that ground, the current reading may embody some hope. But it is still mired in deeply negative readings.

My recitation of German consumer climate history makes it clear that it’s not Covid but the invasion of Ukraine that hit Germany so hard. Of course, that was the second shoe to drop, but it has also been very damaging given German trade links to Russia and German dependence on Russian oil and its gas pipelines.

The economic and income expectations in GfK are also still weak with readings that rank lower only about 30% of the time in both cases. The propensity to buy ranks lower 20.5% of the time. These components of the GfK index are up-to-date only through March. Both economic and income expectations did improve their monthly rankings by four- to five percentage points in March. The propensity to buy was little change on the month.

As for Other Europe... Italy and France have confidence readings up-to-date through February. Italy shows some upward momentum; France does not. France’s confidence ranking is weaker than its February level about 30% of the time- like the German components. Italy is much better off with a 76.6 percentile standing. The U.K. reading on confidence is updated through March and has been relatively stable at a 32.3 percentile standing.

Italy is the outlier here showing more strength than the others although that’s not because of substantially better economic performance. I’d say Italians simply appear to be more resilient. Italian inflation has come down faster than it has elsewhere in Europe. Italian GDP declined early, in Q1 and Q2 of 2023 and has since bounced back strongly in Q3 and Q4 of 2023. But Italy’s retail spending and MFG PMI as well as its conventional industrial production index continue to show weakness and declines. Italy’s unemployment rate also continues to fall but remains well above the EMU rate at 7.2%.