Economy in Brief

The manufacturing climate reading for France fell to 101.1 in April from 103.5 in March and an elevated 104.5 in February. After having several months of more elevated readings, the French manufacturing gauge is reverting to weaker readings. The gauge still is not weak; its rank standing is below its historic median (below a 50-percentile rank standing). It has a moderately weak ranking value of 43.8% which is roughly 6 percentage points below its historic median on data back to 2001. However, looking at the change in this index back to January 2020 before COVID struck, the index is, on balance, lower in April 2023 than it was at that time.

Manufacturing readings Manufacturing components show that production expectations weakened in April compared to March and have weakened for two months in a row (and have net negative readings in 11 of the last 12 months). Industries report the personal likely trend for production, that is the trend applicable to the individual industries rather than to industrial production overall has weakened for three months in a row and logged a relatively sharply weaker 4.7 in April, down from 10.0 in March. The recent trend for manufacturing overall has weakened for two months in a row and is below both its January and February levels.

Orders and demand fell sharply in April; the -17 net negative reading follows a -12.7 response for March. March had improved relative to February and a two month move to stronger readings (smaller negative readings) was in progress until April. Foreign orders and demand have also weakened to -9.3 in April from -8.7 in March. That reading had improved for three-months running until April. However, the April to February readings remain clustered in a tight range. But February, March and April are significantly stronger than January.

The inventory metric shows a jump in April compared to March and gives us the highest ranking of the year at plus 21.7; it’s also the strongest reading since December.

As for prices, the ‘own likely price trend’ moved sharply lower compared to manufacturing prices in March; April was down to 12.8 from 28.1 in March. The inflation reading was stronger in January as well. Weakening price pressures have come about since these pressures peaked in December 2022. Overall, the manufacturing and industrial price level also fell to 46.8 in February from 55.9.in January; Industrial prices as a group reached peak pressure in April 2022 and pressures have been easing month-to-month since then with only one small exception in September 2022.

Standings of March readings The rank percentiles for manufacturing climate show overall industry climate below its median at a 43.8 percentile standing. Manufacturing production expectations are also below their median at a 44.9 percentile standing. The recent production trend, however, is slightly better than it's been over the previous period with 61-percentile standing, above its median. But the own-industry, or personal likely trend, shows only a 28-percentile standing, sharply below its median. Interestingly, contributors to this survey on average see their own industry performing a lot worse than for production overall. Orders and demand have a 45-percentile standing, below their historic median while foreign orders and demand have been above average, with a 61.9 percentile standing, a moderately firm reading. Inventory levels are now high in March with a 98-percentile standing; they are rarely higher. The ‘own’ expected price trend has a ranking in its 79th - nearly 80th -percentile. The manufacturing price level trend is slightly firmer near an 83-percentile standing.

Most activity readings are below their level of January 2020 before COVID struck; the exceptions are an 11.1-point change for the recent production trend and the 14.7-point change for inventory levels. Prices, of course, are much higher with the likely price trend 10.3 points higher than in January 2020 and the manufacturing sector price level higher by 27.3 points.

U.S., Euro Area and U.K. inflation lose momentum, but U.K. inflation is the most stubborn U.K. inflation, on its CPIH measure, rose 0.6% in March, a disappointingly large increase after gaining 1% in February. Inflation in the U.K. is 8.9% over 12 months, decelerating to an 8.4% annual rate over 6 months and then trimming down to 7.2% annualized pace over 3 months. This is still very hot inflation. In addition, the core measure of inflation rose 0.5% in March after rising 0.9% in February. The progression of core inflation goes from 5.6% over 12 months, rising by 5.8% when annualized over 6 months and rising again to a pace of 6.1% over 3 months. This is exactly the wrong progression for the U.K.

U.K. comparative inflation Comparing U.K. inflation to inflation in the European Monetary Union and to the United States, the U.K. has currently the highest year-over-year inflation rate by a large margin. It also has the smallest decline in the year-over-year inflation rate when all are measured on an HICP basis. Year-on year inflation on an HICP basis in EMU is 6.9%, U.K. HICP inflation is at 10.1% and U.S. HICP-basis inflation is at 5.3% (the U.S. HICP is up to date though February). Year-on-year EMU inflation is lower by 0.6%, U.K. inflation is higher by 3% and U.S. inflation is lower by 3.6%. The U.K. is a clear laggard on inflation progress. The U.S. is making the most progress in this grouping.

U.K. inflation dynamics The U.K. inflation progress for the headline is poor and for the core, it’s in the wrong direction. Not surprisingly the diffusion statistics for U.K. inflation that measure inflations breadth across the components in the table also is poor. One year ago, the year-over-year inflation rate had accelerated from what it had been a year before in 90% of these categories. Currently, over 12 months, the 12-month inflation rate is still accelerating in 64% of the categories compared to what it was one year ago. Over 6 months, there's a break, as inflation accelerates in only 27% of the categories compared to the inflation rate over 12 months. But then, over 3 months, the trends are back to broad deterioration as diffusion is again at 64% comparing the 3-month inflation rates to inflation rates over 6 months. These statistics do not show that there is much progress in train in the U.K. Over 3 months, the inflation rates that are deteriorating compared to 6-months are for housing & household expenditures, furniture outlets, transportation (reflecting the oil price weakness), and for restaurants & hotels (where, despite decelerating, the 3-month inflation rate is still 10.7% annualized).

U.K. economy: In terms of the performance, there has been a slight tendency for the unemployment rate to increase. In January, the unemployment rate is up to 3.8%; six months prior to that it had been as low as 3.5%. The unemployment rate in the U.K. has crept higher, but it doesn't show strong signs of accelerating.

On balance: The Bank of England still has work to do. In fact, its situation is somewhat worrisome because of the acceleration that we see in core inflation. Global trends (that we will look at below) are moving in the right direction; they will provide a better environment for inflation fighting ahead. They can provide some assistance in gaining control of inflation. But the current situation in the U.K. is that (1) inflation is too high, (2) it's stubborn, or in terms of the core measure, (3) it's simply moving in the wrong direction and (4) still too high. The main burden for success falls on the BOE.

The ZEW survey by German financial experts continues to show widespread negative readings in April. The economic situation gets substantial negative readings for the euro area and Germany while the United States gets a small positive reading. Expectations for Germany are positive while expectations for the U.S. are negative. In all, the expectations and economic situation diffusion readings have weak rankings below their 50% mark, meaning that they are below their respective medians on data since 1992 – a 30-year stretch.

Nonetheless, the economic situation according to the ZEW experts improved between March and April in the euro area and Germany with readings changing from the negative mid-40s to the negative low-30s in diffusion terms. For the U.S., a positive reading of five in March gives way to a positive reading of 4.1 in April, a small setback. Expectations deteriorated month-to-month in Germany and in the U.S. on readings ranging from a ranking below the 30th percentile to below the 20th percentile.

Inflation expectations are deeply negative implying that inflation is strongly expected to fall from where it is now. The month-to-month numbers even became slightly more negative indicating that inflation progress is slightly more strongly expected. The ranking for the inflation metrics is well below the 5% level for the euro area, Germany, and the U.S. The expectation for inflation to decelerate is extremely strong.

Interest rate expectations for short-term rates moved up slightly in the euro area and moved down in the U.S. For the euro area, there's above-median reading with diffusion at 68.5 in April having moved up from 67.9 in March. In the U.S., the April reading moved down rather sharply to 44.7 from 55.3 as the ZEW experts are looking for below median rate changes compared to March. However, in both cases, the queue standing for interest rates is above the median, but much higher, at an 85.5 percentile queue standing for the euro area, compared with a 54-percentile standing in the U.S., where some are beginning to see the end game insight for the Federal Reserve.

Long-term interest rate expectations saw their month-to-month diffusion readings decline, in Germany from 28.4 in March to 21.8 in April; in the U.S., expectations fell from 18.6 in March to 9.2 in April. The queue standing for the German expectations are in their 28th percentile. For the U.S., the queue standing is in its 14th percentile. The outlook for long-term interest rates is clearly moderating.

Stock market expectations between March and April did not change very much. They stepped up in the euro area to a reading of 13 from 9.9, and also in Germany to 13.5 from 12.7. The United States’ expectations slid to 12.2 from 16.1. However, all of these are historically weak readings. The queue standings for the euro area are at its 7.2 percentile. For Germany, the standing is at its 6.6 percentile. The U.S., with a lower diffusion reading, has a stronger standing at its 24.7 percentile. The outlook for the stock markets remains subnormal and guarded.

The final metric is for the dollar against the euro and here while the reading for the U.S. dollar is still at a -6.6 in April, that's an improvement from -10.4 in March, with the queue standing at its 44.7 percentile, below its historic median but not by much. Exchange rate changes have not been much in the limelight recently.