Economy in Brief

In January the HICP for the European Monetary Union rose 8.7% year-over-year, down from its 9.3% year-over-year gain in December. This is the mildest 12-month gain since it rose by 8.7% in June 2022; the pace was last lower in May 2022 rising 8.1% year-over-year. Similarly, the six-month inflation rate fell to 7.3% in January from 7.9% in December. This is its slowest pace since December 2021. The annualized three-month gain in the HICP is just at 3.2%. That is sharply lower than December's three-month rise at a 6% pace and it's the slowest pace since June 2021 (2.9%). But since the drop in the three-month pace from December to January is so sharp - just about having the pace from 6% to 3.2% - we should withhold judgement about the durability of this slower pace. For one thing, three-month growth rates are less reliable than the longer-term growth rates. Also, this is headline inflation and we have seen some increase in energy prices on global markets recently. The slowdown in the three-month pace may not be something you can take to the bank.

Somewhat mixed results: The inflation numbers for the month are at the same time encouraging and discouraging. Over five years the HICP average is rising at an average of 3.4%, which is well above the target rate of 2%; while the core rate, at 2.2%, is not very far from the target. This highlights the fact that much of the inflation has been in those components that are in the headline and not in the core. Food & energy prices have soared during this period. For much of the rest of the HICP, there has not been as much elevation although that's not to say the core prices are currently well behaved. They are not.

Germany's IFO gauge for climate improved to -4.3 in February from -7.3 in January. The current all-sector index deteriorated slightly to 14.0 in February from 14.4 in January, but that deterioration was wholly because of a deterioration in the manufacturing sector; every other sector improved on the month. Expectations improved with the all-sector expectations index moving to -14.5 in February from -18.9 in January; there were improvements in all sectors, on the month. However, every single sector continues to have a net negative expectation reading. While there is some improvement and, while there is broad improvement, the IFO index only represents improvement from an extremely low level to a slightly less weak level. As an example, the all-sector expectations index has a queue standing at its lower 10th percentile; the all-sector current index has a standing in its 23rd percentile; and the overarching climate index has a standing in its 19th percentile. Any percentile standing below the 50-percentile mark is a standing below the median for that measure on data back to 2005.

On a shorter timeline comparing the February values to their respective levels back in January 2020 before COVID struck, we see declines for all of the measures except for manufacturing. That sector is slightly stronger on its climate, on its current, and on its expectations readings. For manufacturing, all of those changes are positive whereas for all of the other components all of those changes are negative. Since COVID struck, all sectors of the German economy have had a very difficult time getting back into gear.

The current-situation gauge shows rampant weakness with all sectors having queue rank standings below their 50th percentile except for construction. Construction has a 64.4 percentile standing; however, the retail sector is close to the 50-mark with a 49.5 percentile standing. The next closest is wholesaling, at a 40th percentile standing. Manufacturing, even though it has risen from its January 2020 level, still has only a 29.6 percentile standing. Services have only a 22.7 percentile standing. In terms of the current indexes, the assessments by participating in firms in the survey show continued weakness compared to historic performance.

The IFO expectations survey shows net negative readings up and down the line; all of them improved month-to-month. The queue rank standings for all of these are weak, below their 15th percentile for all industries except manufacturing that has a ‘whopping’ 19.4 percentile standing. The weakest sector response is from construction with a 3.7 percentile standing; services have an 8.3 percentile standing. Compared to January 2020, all of the readings are weaker except for manufacturing as noted above.

The S&P flash (preliminary) PMIs show improvement across all early reporters in the table for the composite and for services. All composite indexes are above 50 showing expansion and all service sector readings are above 50 showing expansion in that sector as well. Manufacturing gauges improve month-to-month in the U.S. and the U.K., but they ease in Japan, the EMU, as well as in Germany and France separately. Manufacturing PMIs are still below 50 showing contraction everywhere.

A shift to strength- These results stand out starkly in the table that labels readings as stronger or weaker month-to-month. In January, only 4 of 18 readings were weaker month-to-month. In December, only four were weaker and three of those were readings for the U.S.

Sequential trend- Despite monthly evidence of the tide turning toward strength, over three months (a period calculated on hard data and ending in January) data show only 5 stronger readings over three months, four are stronger on balance over 6 months compared to 12-months and only two are stronger over 12 months compared to their levels of 12-months ago (both of those are for Japan).

Overall view of February- Flash standings data for February values show eight of eighteen readings above their median values on data back to January 2019. Manufacturing has a rank below 50 (below its median) for all countries and areas in the table. Services readings are below 50% only in the U.S. and Germany. Only the U.S. and Germany have composite standings below their respective 50% marks – but France is on the cusp….

Manufacturing- The U.S., France, and Japan have extremely low manufacturing sector queue standings in February with rankings below the 15th percentile. The EMU, Germany and the U.K. have standings around their 33rd percentile, at the border of the bottom third of their respective queue of responses.

Service sector- Only Japan has a strong service sector in relative terms with a 96th percentile standing, the U.K., France and the EMU have standings near the upper one third of their historic queues of data. Germany has a below-median 46th percentile standing; the U.S. has an even weaker 26th percentile standing.