Economy in Brief

Third quarter GDP in the European Monetary Union weakened and surprisingly contracted. GDP fell at a 0.4% annual rate in the third quarter after rising by a 0.6% annual rate in the second quarter. The unexpected drop has naturally raised questions about the possibility of a rule-of-thumb recession occurring in Europe (some report this as a ‘technical’ recession. However, there's nothing technical about two declines in a row {counting ‘all the way’ up to 2.} Rather, it is a rule-of-thumb that sometimes makes sense, and sometimes does not). We are reminded that in the first and second quarters of 2022, real GDP in the United States declined, with GDP falling at a 0.5% annual rate in the first quarter and then edging lower by a 0.1% at an annual rate in the second quarter. Almost no one called that a recession. Those that did probably did so more for political reasons than for economic reasons. The U.S. GDP drops were not considered to be part of a recession in the U.S. by anyone who looked at data seriously. The ongoing substantial growth in employment in the U.S. during those two quarters made the drops in GDP oxymoronic recession signals. This reference highlights the fact that recessions are more complicated than just a couple of numbers’ weakness quarter-to-quarter and it has a lot more to do with the economic processes that might be in play.

Europe....no recession but LOTS of weakness Right now, in the European Monetary Union, Italy reports a 0.4% GDP decline in the second quarter and flat GDP in the third quarter. Apart from that, no other early reporting country is flirting with a rule-of-thumb GDP definition. However, it's quite clear that there is a lot of weakness. • Germany, for example, shows low growth; it has GDP up by 0.1% in the second quarter after being flat in the first quarter and it has a decline in GDP in the third quarter, to go along with the decline in GDP in the fourth quarter of 2022. Germany, in the last four quarters, shows two declines in GDP, one quarterly increase of 0.1% (annualized) and another quarter which GDP growth was flat. We can certainly argue about whether this constitutes some kind of recession in Germany. It certainly constitutes an extremely weak period of growth for the German economy. • Ireland has two previous quarters of negative growth in the fourth quarter of 2022 and in the first quarter of 2023. That string is interrupted by a 0.5% increase in the second quarter and now a 1.8% annual rate decline in the third quarter. Ireland has three GDP declines in the last four quarters. • Portugal logs a decline in GDP in 2023 Q3 after an increase in Q1 of only 0.1% annualized. • The four largest European Monetary Union economies show tepid growth at a 0.1% annual rate in the current quarter after two quarters in which the annual rate for growth was 0.2%. They were preceded by one quarter in which GDP in the four largest economies fell at a 0.1% annual rate.

Consumer confidence in Finland moved lower again in October as a new round of weakening appears to be well underway. The graphic shows a clear turning in confidence although the clear turning is not yet represented in sequential averages in the table that show a -11.4 measure over 12 months, -9.8 over six months, a reading that reflects some improvement compared to the 12-month measure, and then further deterioration to -10.7 over three months. The failure of the sequential averages to show what appears to be ongoing and steady deterioration is an artifact of where we are in the cycle of deterioration. Ther is no waffling of the trend, as you can see.

The table (below) also presents the queue standing of confidence in October at 4% which tells us it's been lower historically only 4% of the time (ranking are on data back to 2000). However, this is an improvement from a year ago when the rank was 0.4%.

The Economy, now- The reading for Finland's economy now in October has improved slightly from September, moving up to -40.9 from -42. The expectation for the economy in 12 months, however, is weaker at -18.8 in October compared to -18.1 in September. These two economy readings, one for now, and the other for 12 months ahead, are both substantially weaker than the numbers that were posted in August just two months ago. The rankings, however, are improvements from what they were a year ago but are both still below their respective lower 15-percentile, marking the responses as still extremely weak.

Inflation- Consumer price inflation in one year is expected to be slightly higher. The move up is not so impressive; but what's impressive here is that there's no improvement expected. Meanwhile, Finland is a member of the European Monetary Union and is still subject to the ongoing tightening and efforts of the European Central Bank that claims to be focused on reducing inflation back towards its 2% target.

Unemployment- The prospect for unemployment over the next year has been reduced in October from September and both October and September show weaker readings that are significantly weaker readings than in August. Bringing the unemployment question home to roost, we see that individuals are also less threatened by the more immediate prospect of personal unemployment; their concerns about personal unemployment are diminished in September compared to August and in October compared to September. Ranking these two unemployment measures historically, the risk of overall unemployment has an 18.5 percentile standing while the risk of personal unemployment has a slightly higher 24.2 percentile standing. Both standings are substantially reduced from what they were one year ago when concerns about unemployment were about twice what they are right now in October 2023.

Environmental perceptions Good time to purchase durable goods?- The favorability of the times to purchase durable goods have not changed very much over the span of the last three months although conditions have slightly improved. Nonetheless, the historic ranking of this metric is in its 3.6 percentile, marking it as rarely weaker and therefore marking the slight improvement as a Pyrrhic victory.

Favorable time for saving?- Perceptions of the favorability of the time for saving have worsened slightly over the last three months and the metric has a 1.1% standing. The rankings for the ‘favorability of the time to purchase durable goods’ and the ‘favorability of the time for savings’ one year ago both were at historic lows. Over the past year there has been some improvement but very little. The real story remains that consumers still seem to feel that their backs are to the wall.

Bank loans- The favorability of the time for raising a bank loan has worsened over the last three months. The historic ranking of that response is lower only 0.4% of the time. And the ranking of this metric is slightly worse than it was 12 months ago.

Household financial situation- The overall household financial situation eroded in October compared to September and is also lower than the August reading. At a level of 20.5, it's on its 12-month low. The queue standing for this measure is roughly in the lower 10% of its historic queue of values and it has deteriorated sharply from a year ago when the queue standing was still quite solid in its 81st percentile. This very sharp deterioration reflects a clustering of readings on the financial situation in the mid-20s for this metric historically so that a relatively minor-seeming drop (to 20.5 from 27.4) crashed the overall standing of the response from 80th to the 10th percentile in terms of its historic ranking! On one hand, the financial situation has not been assessed as that much weaker than before; on the other hand, it has still fallen to a historically weak reading. This phenomenon may have something to do with the socialistic nature of the economy and people seeing their lot largely as like everyone else, and with that may come some denial in the willingness of people to recognize deterioration when it happens. Certainly the 81-percentile ranking of one year ago seems more out of line with other year-ago responses than the current 10-percentile ranking amid the 2023 responses.

Savings- Household possibilities for savings over the next month are ranked as slightly stronger month-to-month but weaker in October than in August. September marked a 12-month low on this reading. The October ranking for this measure is low at 3.3% while a year-ago the ranking was at 13.6%. The assessment of the conditions for saving over the next 12 months has worsened over the year.

This week we turn our attention to South Korea after it revealed an improved economic outturn for Q3 just last week. The economy’s rebound was driven in large part by its semiconductor industry as global chip demand recovered some poise over the period. With that said, while the latest news offers some headline reprieve to South Korea watchers, underlying domestic issues persist. In particular, the indebtedness of South Korean households flags continued reason for concern, as mortgage loans surged following the introduction of 50-year loans in July. The fragility of the situation is further underscored by households’ significant floating-rate loan exposures amid a high-interest rate environment, with delinquency rates already rising in recent months. Against this backdrop, we also discuss the challenges faced by the Bank of Korea. With that said, it seems likely that the central bank keep rates higher for longer, for now, until the data justifies otherwise.

South Korea’s Q3 performance South Korea enjoyed an encouraging turnaround in economic performance in Q3, following three prior quarters of slowing growth. South Korea’s GDP growth rose to 1.4% y/y from 0.9% in Q2 (chart 1), driven by trade, as export growth improved while imports steadied from previous declines. In contrast, growth contributions from private and public consumption were only modest, while capital formation exerted a mild drag.

In this situation, the Insee survey on household confidence in France showed a small uptick in October although that still leaves it short of its August level and leaves it at a weak ranking on data back to 2001. Ranked on that timeline, confidence currently has a 10.6 percentile standing, implying that it has been this weak or weaker only about 10% of the time during that period.

Strength in the survey is rare- Most of the components of this survey are weak. The exceptions are price developments, of course, because inflation is still high. Inflation over the last 12 months saw an uptick in the assessment in October compared to September and an overall ranking in its 95th percentile. However, expectations for the next 12-months show a slight reduction for inflation that's anticipated and a ranking that is only in its 12.8 percentile, indicating that inflation is broadly expected to be on a declining profile ahead. The other component that has higher standing is the assessment of savings. This is usually a negative barometer since when spending conditions are poor savings conditions turn out to be better and that's true this month in the Insee survey. However, month-to-month the assessment ‘favorable to save’ fell relatively sharply to 28 in October from 36 in November as the ‘ability to save’ for the next 12 months was unchanged. Even so, with the sharp drop this month, the ranking of the favorability for savings has an 82.8 percentile standing and the ranking of the ability to save has an 88.3 percentile standing.

Weak living standards: But unemployment expectations are a positive- The rest of the surveyed components show anything from substantial to extreme weakness. The living standard assessments show past living standards unchanged month-to-month and with a 2.2 percentile standing. This implies that living standards over the last 12 months have been that bad or worse only about 2% of the time. Over the next 12 months, living-standard expectations improve slightly but still only register at 18.6 percentile standing - a standing in the bottom 20% of the historic queue of data looking back to 2001, a period of just over 20 years. Unemployment expectations over the next 12 months fell slightly in October to a reading of 17 from a reading of 20 in September. This has a 29.9 percentile standing. In this case, the low standing is relatively good news because it means expectations for unemployment are relatively low.

Spending environment has rarely been worse- The environment for spending deteriorated slightly on the month with an October reading that fell to minus 45 from minus 44 in September. The ranking of this reading is in the bottom one-percentile of all readings back to 2021. French respondents to this series find this an extremely unfavorable time and make major purchases, having been this bad or worse only about 0.7% of the time over the last 20 years – the third worst year for major purchases back to 2021 (worse only in June 2023 and in April 2020).

The financial situation is poor- Given the poor outlook for the spending environment, it's not surprising that the financial situation also gets low marks. The situation over the past 12 months improved just a tick from September, but the response has a low, 9.9 percentile standing implying that it's been this bad or worse only about 10% of the time historically. Looking over the next 12 months, there's another small two-tick improvement in the survey that produces a ranking in its 35th percentile. That's still nearly a bottom 1/3 standing for the expected financial situation – an improvement compared to the bottom 10-percentile. It's a weak reading, but not as weak as some of the other assessments in the table.

Weakness in past living standards, spending and the past finical situation seem to play a large role in setting the bar of assessments so low in October. The overall confidence indicator has a 10.6 percentile standing.

The turbulent wake of COVID- Much of this weakness has come in the wake of COVID. Comparing household confidence, for example, in October 2023 to its level in January 2020 before COVID struck, the measure is 20.4 points lower than it was in early-2020. The assessment of past living standards is 41.9 points lower and the expected living standards are 26.5 points lower. The response on the unemployment rate is about 11 points higher than it was in January 2020. The inflation, of course, is much worse with past price developments up by nearly 100 points, but then, of course, the expected future expectations are lower only because inflation is high, and it's expected to unwind to some extent. The spending environment is worse than it was in January 2020 by some 38 points. The financial situation in the past 12 months is worse by 16.8 points than it was in January 2020 and the financial situation expected in the 12 months ahead is worse by 12.9 points – what they did not know in January 2002 nonetheless hurt them badly. Remember that expectations are just that and nothing more.