Economy in Brief: May 2022

Italian business and consumer confidence indexes both are substantially lower in May than in February before the Russia invasion of Ukraine occurred. Both business and consumer confidence eroded in March and in April; business confidence eroded further in May but consumer confidence in Italy has rebounded in May. This is a different pattern from what we've seen in Germany where confidence fell very sharply in May after more gradual erosion. The confidence figures for Italy also have much higher standings than those for Germany, indicating that Italy is showing less anxiety over the ongoing conflict and may be impacted less by adverse economic forces.

Confidence and survey metric standings The percentile standing for consumer confidence in May is at its 51.1 percentile. For business confidence, it is at the 79.7 percentile, a much higher and even firm standing. Consumer confidence is barely above its median reading; the median occurs, of course, at a ranking of the 50th percentile. And while consumer confidence is above its median in Italy, it is below its mean.

The components for confidence show us conflicted patterns. The percentile standing for the overall situation over the last 12 months is placed at 51.1%. However, over the next 12 months, the overall situation has a ranking at the 18th percentile, a much lower the expectation. For unemployment over the next 12 months, there is a 71.8 percentile standing, an extremely high reading. Household budgets for the period ahead are assessed in the 73rd percentile, a firm standing for that variable.

We see the same dichotomy in our assessment of the household financial situation with the last 12 months assessed barely above the median value at a 50.5% while the standing for the next 12 months at a 5.6 percentile standing. The future clearly is a matter of concern for in households. However, the assessments for savings in the current and future periods are roughly the same with rankings in the mid to upper 80th percentile for both. The current environment for making a major purchase has a 59% outstanding, slightly firmer than the assessment of the overall situation or for confidence overall - but that is still a relatively modest reading.

Changes since February The changes in the readings versus their levels in February show deterioration in almost all cases. The prospect for unemployment, for example, is up by 9 points; the overall situation of the past 12 months is 24 points worse while the overall situation over the next 12 months is assessed as 31 points worse. The household financial situation over the previous 12 months is 3 points worse while the assessment for the next 12 months is 17 points worse. Household savings is the lone exception to the worsening trend with the current reading 2 points better, but the future reading follows a familiar pattern and is three points worse. The environment for making major purchases in May is 12 points worse than it was back in February.

Tying things together The standing rankings in some cases are still relatively firm; yet, the outlook for unemployment is dismal and then the reduction in readings between February and May is striking and consistent. The pick-up in the readings between April and May is a curiosity and will have to be watched to see if there's any reason for it or whether it's a part of normal volatility. However, an increase of 2.7 points in consumer confidence month-to-month is a significant improvement and should have some rationale behind it.

Germany's GfK consumer climate reading improved ever so slightly in June to -26 from -26.6 in May. This look-ahead view of climate for June improves but is nonetheless still extremely weak. The May reading is lower than the June reading, but the June reading has been weaker historically only 0.4% of the time less than 1/2 of 1% of the time (that translates into once before, namely in May 2022). Consumer climate in Germany is literally scraping the bottom of the barrel in 2022.

Climate in Germany continues to be extremely weak. Climate had peaked about one year ago; however, much of the deterioration is quite recent. In February, for example, the climate reading was only -6.7 and only slipped to -8.5 in March, then, in April, it stumbled badly to -15.7 and then May registered minus 26.6. Since the Russian invasion of Ukraine, the deterioration in climate has been greatly expedited.

The component readings for climate in the GfK consumer confidence framework lag by one-month so we have our most current readings as of May. In May the economic expectation reading improved from -16.4 to -9.3, the income expectation reading improved from -31.3 to -23.7, but the propensity to buy deteriorated slightly from -10.6 to -11.1.

Regardless of the month-to-month changes in the underlying components, the components all rank at weak levels in their respective historic queues of data. The economic index has been lower than it's May value 21.6% of the time, the income reading has been lower 0.8% of the time, and the propensity to buy has been lower only 22.4% of the time. These are uniformly week readings all of them below their respective medians (remember medians for ranked data occur at the 50th percentile). These readings are well below their medians and all of them in at least the lower quartile of their respective ranges.

We include consumer readings for Italy, France, and the United Kingdom on concepts of consumer or household confidence as well. These readings also show their recent cyclical peaks to have occurred roughly one year ago; they all show some degree of deterioration since February coinciding with the invasion of Ukraine by Russia.

All of these consumer confidence metrics show weakness setting in from a relative peak of just about one year ago. However, all of them also show confidence getting much weaker after February 2022 in the wake of the invasion of Ukraine. Confidence in Italy has a 48.6% standing, confidence in France has a 17-percentile standing, and confidence in the U.K. has a 1.6 percentile standing. However, don't take these differences in standing as too literal because the Italian data lag the French and U.K. data by one month and the French and U.K. data lag the German data by one month. As we see with the German data, there is a substantial deterioration that occurred in May compared to April and then remained in place in June compared to May. The higher reading, we see in Italy is probably just because the Italian data are not as up-to-date and aren't getting a more current reading on the mood of the Italian household.

What seems clearest from these data is that consumer attitudes have been greatly affected and substantially affected by the invasion in Ukraine and that the current mood of consumers is not going to be conducive to better growth ahead and potentially leaves the economies even more vulnerable to what is expected to be a new round of tightening by central banks. Inflation is clearly out of control, Whether central banks are able to raise rates fast enough to cut off and reduce inflation but slow enough and not high enough to precipitate recession is the great unanswered question of the day. But this is something all investors are watching. The apparent vulnerability of consumers makes this objective an unlikely success for central banks.