Economy in Brief

In April, manufacturing IP among select early reporting EMU members and other European economies fell in nine of the fifteen countries in the table. Among the 13-early reporting EMU members, the median manufacturing output decline was 2% in April. The percentage of EMU economics with IP accelerating month-to-month remained low at 38.5% in April compared to 30.8% in March. In February, output showed a preponderance of acceleration (69.2%).

Sequential growth Over three months, six months and 12 months, IP among EMU members showed declines in the median gauge, but the drop is not worsening persistently as the annualized output drop over six months was less than the drop over 12 months. But then, the median drop over three months accelerated again surpassing the speed of the drop over both six months and 12 months.

Manufacturing output momentum EMU members show the proportion of members with output acceleration at or below 50% on all horizons. In addition, over three months, manufacturing output declines in nine of fifteen reporters in the table, eight of fifteen reporters over six months, and eight of fifteen over 12 months. Output is not just weak, but it is declining in a preponderance of European economies. Germany, the largest EMU economy, shows manufacturing output down over three months but rising over six months and 12 months. France, the second largest EMU economy, has no output declines over these periods. Italian manufacturing output declines each of the periods. Spain, the fourth largest economy, shows output declines over three months and 12 months. So far, the largest of the large economies in the EMU show the most resilience. But Germany gives way to an output decline over three months. In addition, Belgium, Finland, the Netherlands, Portugal, and Norway- in addition to Italy- show output declines over each of the three periods. Only the Dutch and Norwegians show progressive deterioration in this group. However, Germany, with only one output decline over three months, shows progressive slowing in growth from 12-months, to 6-months, to 3-month; so, do Malta and Ireland, two of the smaller economies.

I'm reading stories today about how Europe is now in recession. There was a revision to GDP growth for the European Monetary Union that puts first quarter growth in negative territory at -0.4% (annualized Q/Q) matching it with a -0.4% (annualized Q/Q) change in the fourth quarter. This magically gives us two quarters in a row of negative GDP growth – and… here we go again.

Is 1+1=2 the ‘technical definition’ of arithmetic? I have long railed against using this ‘rule of thumb’ as an unimpeachable definition of recession. I am completely opposed to anyone using the expression ‘two consecutive quarters of negative GDP growth is a technical definition of recession.’ When was the last time you ever thought of 1 + 1 equaling 2 being something that was technical? There was nothing technical about this. It is, in fact, what we economists call a ‘rule of thumb,’ and that denigrates the concept to something that more accurately describes what it is. It's an exaggeration or a simplification of an underlying process that is much more complicated than the rule that we are applying to it. In this case, two consecutive quarters of negative GDP growth is a gross simplification of what are rather complex underlying economic processes. In the U.S., the NBER uses 3-concepts to vet a period as recession: (1) Is the period of economic disruptions long enough? (2) Is the disruption deep enough to be termed ‘recession?’ (3) Is the disruption broad enough across the bulk of the economy? One plus one equals two glosses over most of that.

Not long, not severe, a breadth of discomfort…not pain More to the point, this is a two-quarter decline in GDP that's less than 1% at an annual rate - and that's true even when the two declines are combined! I thought that we put this nonsense behind us in 2022 when everyone failed to call two key back-to-back declines in quarterly U.S. GDP a recession. U.S. GDP in the first quarter of 2022 declined by 1.6% at an annual rate; it declined in the second quarter at 0.6% at an annual rate. These are combined annual rate declines much larger than what we're seeing in the European Monetary Union. And yet we denied calling that a U.S. recession. One of the reasons for this was because the rest of the economy was performing quite well. The labor market continued to perform extremely well and so it was quite clear to everybody that this ‘rule of thumb’ had failed. In the European Monetary Union, the unemployment rate continues to drop. The economy has been under some stress. But I'm still quite against using this two-consecutive-quarter of GDP decline rule to call a recession now.

The latest UK housing market data from the Royal Institute of Chartered Surveyors (RICS) residential market survey and from the latest Halifax House Price Index revealed surprising signs of improvement.

The key messages from these reports were as follows-

• The RICS measure for new buyer enquiries in May climbed to -18%, a significant improvement compared to the previous reading of -34% in April. However, despite a noteworthy turnaround in buyer interest over the past 12 months, the figure still suggests a relatively subdued trend in buyer demand.

• Alongside this, the agreed sales balance rose to -7% in May, also much less negative from figures of -29% and -18% recorded in March and April respectively.

• The national house price balance additional remained in negative territory but still rose to -30% in May, up from –38% in April. This was firmer than expected as the consensus forecast was centred on a net balance of -38%.

• This news chimed with yesterday’s survey of house prices from the Halifax building society. The headline house price index, for example, showed no growth in May, following a decline of 0.4% in April.

• Still, the weaker house price trend in recent months meant that UK house prices experienced their first year-on-year contraction since 2012 with a -1.0% fall in the annual rate of growth in May.