Economy in Brief: March 2024

The U.K. GDP revision is said to confirm the signal of recession for the economy. I know that markets love to look at the 2 consecutive quarters of negative GDP as a rule that will define the onset of recession. However, I still prefer to view this as only ‘a rule of thumb’ and as an indicative signal not a definitive one. I have included the monthly GDP estimates for the U.K. as the accompanying chart for this discussion. What's clear from that presentation is that GDP growth has been asymptotically approaching zero; even broader charts of quarterly GDP growth show pretty much the same thing with GDP growth sliding down from strong post-COVID recovery growth rates to current growth rates that are closing in on zero. There is no doubt that the U.K. economy is in a period of weakness and under performance. And it may, in fact, be in recession or headed for one; however, at this point if it's a recession that's cropping up, it looks like a rather mild one. The two quarterly growth rates involved for Q3 and Q4 are -0.5% and -1.2% and these are at compounded annual rates. The year-over-year rate for the fourth quarter swing is from +0.2% in Q3 to -0.2% in Q4. That's not really a stark difference.

U.K. GDP revisions of quarterly rates of growth The GDP revision took Q4 GDP from a decline of 1.4% to a lesser decline of 1.2% in Q4. Private consumption switched from a decline of 0.6% to a decline of 0.2%. Public consumption rose from -1.2% to +0.3%. And there is a welter of other revelations that had impact as well, but one of the more interesting ones is that domestic demand when revised switched from +1.2% to -0.6% (Q/Q annual rate). That's when the shift begins to look a little bit more like a weaker economy of serious dimension. When domestic demand looking at annualized quarterly growth rates falls by 0.6% in Q4 after falling by 2.7% at an annual rate in Q3, that pair of negative growth rates is slightly more damaging than the pair we see for GDP.

Large trade growth rate revisions Among two of the larger quarterly revisions, exports shifted from a decline of 11% at an annual rate to a decline of 3.1% at an annual rate. Imports were shifted from a decline of 3.2% at an annual rate to a decline of 1.2% at an annual rate. Those are both relatively substantial changes in growth rates. By no stretch of the imagination is the U.K. doing well.

Some of the best news on the horizon is that the inflation picture has been getting better; it hasn't gotten better fast enough to get the Bank of England to start cutting rates yet.

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%.