Economy in Brief: July 2024

EMU growth is a tick slower in Q2 2024 with a flash growth rate of 1.0%, down from 1.1% in Q1. Essentially, it’s an unchanged performance in the quarter at a slow one-percent annual rate.

The Q2 annualized quarterly pacer fails to slow in only two of the seven early GDP reporters in the table as Irish GDP ramps up to a 5.1% annual rate in Q2 from 2.8% in Q1 and French GDP steadies at 1.1%.

However, splitting EMU GDP into the four largest EMU economies (Germany, France, Italy, and Spain) vs. the rest, shows that the slowing is concentrated on the largest EMU economies. For them, growth slows on a weighted basis to a 0.8% pace in Q2 from 1.3% in Q1. The rest of the EMU is estimated to have flash growth at 2.0% in Q2 compared to 0.4% in Q1.

Over four quarters, the Q2 growth rates show EMU speeding up slightly to 0.6% in Q2 from 0.5% in Q1. The four largest EMU economies log growth of 0.8% in Q2, the same as in Q1, while growth in the rest of the EMU falls by 0.3% annualized compared to dropping at a 0.8% pace in Q1.

By country, the quarterly four-quarter growth rates slow in Belgium, France, and Portugal.

The annual four-quarter growth rates in Q2 show only Italy and Spain at a pace above their historic medians; however, Portugal is close with a 47.8 percentile standing. EMU growth has been stronger nearly three-quarters of the time. The four largest economies have been stronger nearly one-third of the time while the rest of the EMU has been stronger more often, about four-fifths of the time.

These ranking benchmarks help to establish a general relatively as a reference for the countries and the country groups as well as for the EMU. The median four-quarter growth among reporters at a 38-percentile standing is relatively stronger than the (weighted) EMU total. This is slightly surprising since four largest EMU economies log growth that ranks higher than for the rest of the EMU.

U.S. growth performance leaves the EMU and all its early reporters in the dust with the partial exception of Spain whose four-quarter growth rate of 2.9% is close to the U.S. at 3.1%. But the relative strength of U.S. growth is at its 73.9 percentile compared to Spain that has a stronger structural growth rate and logs growth only at a 56.5 percentile.

Bad weather is being cited for poor U.K. retail performance in July as sales compared to a year-ago in retailing fell to a net diffusion reading of -43 from -24 in June. However, expected sales are being marked down calling to question the notion that weakness is all weather-related.

Retailing Reported Sales- Orders compared to a year-ago dropped to a net reading of -40 in July from -14 in June. However, sales for time-of-year improved slightly to -36 in July from -39 in June. Stocks relative to sales moved sharply higher into a net +32 in July from a level of +3 in June. Stocks relative to sales showed a huge increase from June to July. The diffusion reading of +32 gives it a 97.5 percentile standing, a standing that has been its higher historically only about 2.5% of the time, marking it as quite unusual.

Sales Issues- An increase in stocks relative to sales like this would usually occur for unintended reasons and so this increase bolsters the argument that sales were unexpectedly weak in July. However, against this background, it’s also clear that sales compared to a year-ago, and orders compared to a year-ago, both have been weakening persistently from May, to June, to July; more than what can be explained by one-month’s bad weather. Sales for the time-of-year were also sharply weaker in June and July than they were in May despite the small improvement in July. The rank standings for both the sales measures and the orders show percentile standings in the bottom 10 percentile or lower by rank for all three of those metrics.

Expected Sales- However, with the July survey, we also get expectations for August. I would expect that if weather had been a primary factor causing conditions in July to be poor, we would expect some bounce back in August and that's not what we see in the survey. Instead for August, we see a sharp deterioration for expected sales compared to a year-ago and expected orders compared to a year-ago; both weaken in August compared to what had been posted for July. Once again sales for the time-of-year improved, this time in August to -21 from -29 in July. The expected stock-sales ratio is up sharply to 21 in August from zero in July and again to a 91.2 percentile standing. Meanwhile, the percentile standings for both the sales and the orders measures are weak in the bottom 15 percentile or lower.

Wholesaling Reported Sales- In wholesaling, we see a repeat of some of the dynamics that appear in retailing for July. Sales compared to a year-ago weakened sharply to -21 in July from -12 in June. Orders compared to a year-ago weakened to -11 in July from -6 in June. Sales for the time-of-year also weakened, and weakened more sharply, for wholesaling to -28 in July from +4 in June. The stock-sales balance for the time-of-year moved up modestly to +9 in July from +5 in June. The queue standings are still weak across the board, in wholesaling but quite different from what we observe for retail sales. Wholesale sales compared to a year-ago and sales for the time-of-year are both weak. But the year-ago measure has a 12.7 percentile standing and the time-of-year or seasonally-adjusted comparison is at a weaker 4.9 percentile standing. Orders compared to a year-ago have a 28.5 percentile standing, still weak, but not in the same dregs as those plumbed by sales measures. The stock-sales balance has a 36.3 percentile standing, elevated compared to the other measures, but again no comparison with the very high ranked standings that we see for inventories in retailing.

Expected Sales- Expected sales for August also show sharp deteriorations with sales compared with a year-ago falling to -19 in August from -4 in July. Orders compared to a year-ago fall to -11 in August from +2 in July. Sales adjusted for the time-of-year fall to -21 in August from -3 in July. The stock-sales ratio balance shows a rise to +9 in August from +4 in July. The ranked percentile standings once again produce the highest standings for the stock-sales ratio with a 39.6 percentile standing that is still below its median which resides at a standing at the 50-percentile mark. The two sales figures are quite weak with sales compared to a year-ago with the 13.3 percentile standing and sales for the time-of-year with a 9.8 percentile standing. Orders compared to a year-ago have a 27-percentile standing, still quite low and just above the lower quartile of its historic ranking of values.

In this week's newsletter, we examine the Bank of Japan's (BoJ) upcoming decision scheduled for Wednesday. Recent shifts in market expectations suggest a marked increase in the likelihood of a BoJ rate hike, as priced in by various financial markets. We have observed that while consumer inflation has remained relatively stable for much of the year, there were some upticks in core inflation in May and June. Additionally, price pressures on the producer side have continued to intensify. This suggests that the BoJ’s “virtuous cycle” between wages and prices may be strengthening. This is particularly evident in the increased inflation among service producers with high labor cost ratios. However, it is important to note that these producer price increases have also been influenced by rising costs in other areas, such as transportation. Lastly, we examine the potential outcomes if the BoJ's monetary policy normalization campaign begins to quicken and leads to a stronger yen. We explore various dimensions of this scenario, focusing particularly on how a stronger yen might affect export growth and tourism.

In reality, it's still uncertain whether the BoJ will announce a rate hike this Wednesday, though market expectations are increasingly leaning towards a reduction in Japanese Government Bond (JGB) purchases. One key area of interest is how the BoJ plans to reduce its substantial JGB holdings and the subsequent impact on financial market liquidity and yields. While a “virtuous cycle” between wages and prices seems to be strengthening, evidence of such a cycle between wages and consumer spending is lacking. This is possibly because real wages have continued to decline.

Market expectations Recently, there have been marked shifts in market expectations regarding further monetary policy tightening by the Bank of Japan (BoJ). While an additional rate hike by the BoJ, following its March policy tightening, has long been anticipated, market expectations for this move have only recently intensified. This shift in expectations is evident in Japan’s financial markets, as illustrated in Chart 1. Specifically, the yen has experienced a significant rally in anticipation of an imminent BoJ rate hike. Moreover, Japan’s near-term overnight indexed swap (OIS) rates, including the 1-week OIS vs. TONAR rate, have surged, reflecting increased expectations for a rate hike within the coming week. These developments suggest heightened anticipation of the BoJ's upcoming decision, which is expected to be announced on Wednesday.

The INSEE manufacturing survey and services survey for France both took a considerable step lower in July in the wake of some turbulent French elections and on the doorstep of France hosting the Summer Olympics. As I write this, there are reports of acts of sabotage on French railway lines intended to disrupt the Olympics. None of those actions is reflected in the data presented here today. But they may emerge in subsequent reports. The monthly drops reported here are the seventh largest for services back to 2000 and for manufacturing the ninth largest month-to-month drop.

Industry climate in France fell to 95.5 in July from 98.9 in June. Climate has a ranking at its 16.7 percentile which means it has been lower less than 17% of the time.

Manufacturing Manufacturing production expectations fell sharply to a reading of -18 in July from a reading of -11.6 in June. The standing for the reading is in its 19.8 percentile, implying that expectations have been lower less than 20% of the time.

The recent trend of production also slipped to -5.4 in July from -2 in June; survey respondents reported that their own industries personal likely trend slipped to -4.9 in July from +1.8 in June. The overall recent trend assessment for industry has a 15-percentile standing, while the personal likely trend standing has a 7.3 percentile standing; both are still extremely low readings.

Overall orders and demand slipped in July to -19.9 from-18.4 in June. That series has a standing at its 35.6 percentile. Foreign orders and demand slipped by more, dropping to -18.5 in July from a reading of -8.6 in June; that series has a 27.1 percentile standing.

Inventory levels rose in July to 8.8 from 8.4 in June and have a 44.5 percentile standing, closer to their historic median; the median occurs at a reading of 50%.

Prices show some lift in July with the own likely price trend rising to +7.0 from +3.7 in June and logging a 62.8 percentile standing, above its historic median. The manufacturing price level indicator rose to +6.9 in July from +2.9 in June, logging or below median 42-percentile standing.

The far-right hand column shows that most of these survey entries are lower than they were in January 2020 before COVID struck. Inventories are slight exception, and prices are an exception as well, showing more pressure now than there had been prior to COVID.