Economy in Brief

The trade deficit for the European Monetary Union (EMU) in November contracted sharply to €15.2 billion from €28.1 billion in October. Over three months the deficit averages €26.6 billion, over six months €33.0 billion, over 12 months the deficit is €26.5 billion. One year ago, the monthly trade balance was in surplus for the 12-month average with a surplus on the order of nearly €12.7 billion.

What went wrong…(what’s going wrong) There are two prongs in this fork in the road as it takes the European Monetary Union from being in surplus on balance in 2021 to being in significant deficit today. The first item, and the one of lesser importance, is the balance on manufacturing trade. In November, this is in surplus with manufacturing trade logging a premium of exports over imports of €31.1 billion; that's sharply higher than the October surplus of €23.8 billion. Over three months, the surplus averages €26.7 billion, over six months it's €22.3 billion, and over 12 months it's €22.2 billion. One year ago, the 12-month average of monthly surpluses was €30.2 billion. There's been a steady slippage in the surplus for manufacturing trade since that; it has just started to reverse as the surplus in manufacturing is back up this month.

The second prong of deterioration is the balance on nonmanufacturing trade, and this is where the deterioration has been the most dramatic; it is mostly because of the rise in commodity prices. But with commodity prices now softening, we see a reversal in the deterioration here as well. Nonmanufacturing trade is in deficit in November to the tune of €46.4 billion; that's lower than October's €51.9 billion deficit. Over three months the nonmanufacturers deficit is at €53.3 billion; that's down slightly from €55.3 billion over six months but up from a deficit of €48.7 billion over 12 months. One year ago, the 12-month average of the monthly deficit was at €17.5 billion. Nonmanufacturing trade has chronically been in deficit in the EMU, but the deficit, traditionally, has been offset by the surplus in manufacturing trade. Over the last year, there has been some further deterioration that is now in flux, but the big shift is in the average for 2022 compared to 2021. The deficit in nonmanufacturing trade has ballooned sharply over the last 12 months as the surplus in manufacturing trade has withered and this has caused the widening gap in the balance of trade by the European Monetary Union. But recent data show how a reversal of that trend is in progress.

Trends in percentage terms… These values in euros have corresponding percentage trends. Looking at the percentage trends we can see that the worm is starting to turn because of growing import weakness as exports do a better job of holding their own…

For manufacturing exports, the year-on-year gain is nearly 16%. Over six months it's at an annualized game of 11%; over three months that gain is holding around the 11% pace. The pace of exports in manufacturing is slipping, but only slightly. For nonmanufacturing exports, the pace over 12 months is 22.4%. Over six months that sags to a decline at a 5% pace, but then, over three months, the pace is at steadies at -4% annualized.

EMU imports show manufacturing imports up 14% over 12 months. For six months imports fall at a pace of 1.5%, but then, over three months, imports fall at an 18% annual rate. Nonmanufacturing trade shows imports up 36% over 12 months. Over six months this reverses to log a decline at a 6% annualized rate, then, that pace decelerates sharply to a -48% annualized rate over three months. This is for imports into the European Monetary Union area from outside countries and includes a good deal of energy imports where prices are falling.

Trade flows in the European Monetary Union are slowing down and they're slowing down dramatically. They're slowing slightly for manufacturing exports, more for nonmanufacturing exports, they're slowing significantly for manufacturing imports and they're slowing dramatically for nonmanufacturing imports where commodity prices particularly for energy have broken.

EMU Members and Other Europe Turning attention to individual countries we see some slightly different patterns in German exports that have held up more steadily rising 14% over 12 months, gain to a 21% pace over six months, then settle back to a 15.5% pace over three months. This compares to German imports where the gains are nearly 30% over 12 months, accelerate to 33.5% over six months, and then decelerate sharply to about 6% over three months.

France shows some similar trends with exports up 16% over 12-months slowing to an 11% pace over 6-months and then falling at a 9% annual rate over 3-months. Imports also show deceleration, rising 19% over 12-months, gaining at a 10% pace over 6-months, then falling sharply at a 20% annual rate over 3-months.

The United Kingdom, a European country outside of the European Union, shows its exports up 29% over 12 months, slowing slightly to a 25% pace over six months then falling at a 13% annual rate over three months. U.K. imports follow the same trajectory only slightly magnified with the 22% gain over 12 months, a 7% annual rate fall over six months and a sizable 27% annual rate fall over three months.

In all cases, we see imports are slowing down. Imports are contracting over three months in France and the U.K. but just crawling at a slower pace in Germany. German imports grow on all horizons, and they decelerate over six months; they're relatively flat over 12 months whereas, in France and in the U.K., exports clearly decelerate and then decline sharply over the recent three-month period.

In other Europe- Finland and Portugal, show export flows rising over 12 months, decelerating and declining at about a 15% annual rate over six months. Portugal shows a 10.6% annual rate drop over three months. Finland shows a 23.3% annual rate drop over three months. Weakening trends are everywhere.

Clear weakening trends…crystal The data are clear and indicative of a broad economic slowing. Both exports and imports have been pulled under the spell of deceleration. Exports are somewhat more diffused because they go to different countries, and they spread to areas according to different weights and trade patterns across the countries. Export performance can be fairly varied for this reason. Still, we see a great deal of consistency in the patterns with only Germany showing some export resilience. On the import side, of course, imports are tied very strongly to domestic GDP growth. We see sharply weaker negative numbers in France and in the U.K. suggesting that domestic demand has declined abruptly. In Germany, while imports grow at a 6% (nominal) growth rate, that is much weaker than the 30% posted over three and six months so that the trend also indicates a substantial slowdown and domestic demand weakness, but perhaps not the same degree of weakness that we see in France and in the U.K.

In the European Monetary Union overall, we can gauge domestic demand a little bit better by looking at manufacturing trends since the price element will have a slightly lesser weight in those flows than in nonmanufacturing flows where commodities are involved. There, we see a reduction in the growth rate of imports from about 14% over 12 months, to a drop at an 18% annualized rate over three months; we see a decline of 3.1% in the month of November compared to a rise of 0.1% in October. Slowing domestic demand is evident (mixed in with weakening prices) for the European Monetary Union where the demand slowdown for the union as a whole is like the experience of France. Demand is weakening, and we can see that in the PMI surveys that have shown encroaching weakness and both the goods and services sectors. Note that EMU and member import and export statistics are different. EMU trade is only for trade between EMU members vs. non-EMU members- that nets out intra-union trade among members that national statistics include as ‘exports’ and as ‘imports.’ This data quirk could understate the weakness in EMU domestic demand, since developed economies seem to be weakening faster than developing economies.

Japan's surveys continue to show a struggle for growth. The Economy Watchers Index for November weakened to 48.1 from 49.9 in October; it has risen from its August low. However, the last four months show readings below 50 which indicate contraction. Similarly, the Teikoku indexes show all sectors with diffusion readings below 50 although sectors evidence a minor bounce in November compared to October. The METI index for industry shows a modest drop in November to 95.2 from 95.3 in October and that is part of an ongoing trend of weakness. The LEI for Japan fell to 97.6 in November from 98.6 in October and is on a declining trend.

Economy Watchers Current: These metrics uniformly show Japan with already weak again our performance is sliding into a period where growth appears to be weaker. The Economy Watchers Index fell in the month as the retail sector dropped to 46.6 in November from 48.8 in October. The eating & drinking sector, which had shown some promise in October as it rose to 61, plunged back to 47.9 in November, its lowest reading since August. The services sector is an exception with a diffusion reading of 52.6, above its breakeven reading but below the 56.8 reading in October; it indicates only bare-bones growth in the sector. As of November, the Future Index fell to 45.1 from October’s 46.4 and it is also on a weakening trend – it points to contraction ahead.

Economy Watchers Assessments: Assessing the level standings in the Economy Watchers index, standings of the headline and its components generally are above their 50th percentile, a level indicating they are above their historic medians (employment is the exception). Index level rankings show a great deal of variation with the services sector reading at a 90.7 percentile standing versus a low at its 26.7 percentile for employment. The Future Index is below its 50th percentile. However, ranked on year-over-year growth, the readings are all below their medians and below their respective 20th percentiles indicating weakness in momentum.

Teikoku Indexes: The Teikoku indices all are below 50 and have been that way for a series of months. However, evaluated against their index levels since August 2009 all the indices are at or above the 50th percentile indicating they are at or above their median values for that period. Still those rankings range from a 50th percentile reading for the construction sector to a high rating of only 64.5% in the wholesale sector. Alternatively ranked against their year-over-year growth rates only one sector, retailing, has a ranking above its 50th percentile; all the rest show growth rates that are below the median growth rates they had previously experienced. Manufacturing has the weakest growth ranking of all at its 31st percentile but that's not much better than construction at its 32.9 percentile, or wholesaling at its 39th percentile.

METI Industry Reading: The METI industry index increased month-to-month and has a ranking of its index level that is only in its 12.8 percentile back to 2009 - an extremely weak ranking for an index level that grows over time. The METI survey creates indexes of activity and is not a diffusion index, like the surveys above. The one-year growth ranking for the industry index is in its 33rd percentile, also below its median, indicating below normal and unsatisfactory growth in Japan's industrial sector.

The Leading Economic Index: Japan's LEI index while fall month-to-month has a level ranking only at its 30.8 percentile, well below its historic median with a growth ranking at its 28th percentile similarly below its historic medium for growth. The LEI index, like the METI industry index, is not a diffusion reading and should growth over time with the economy- a weak level index is a very poor reading.

The Situational Wrap-up These surveys paint a picture for the Japanese authorities that's quite challenging. The current assessments of the state of the economy indicated by the index level ranks are for the most part moderate or weak with few indications of strength. However, the growth rankings are unequivocally weak and pointing to deteriorating prospects. The Economy Watchers Futures Index is particularly weak and disturbing from the standpoint of the growth that it points to, and it agrees with the weakness from Japan's leading economic index that has only a 28th percentile standing.

Policy and Global Conditions The Bank of Japan has been fighting against the moderate inflation and it's in a much different position than other G7 central banks who, as a rule, seem to have much more work to do. But Japan is renowned internationally for its massive government debt levels; fiscal policy is not a tool that Japan can use. Meanwhile, deteriorating conditions and rising interest rates around the world are going to make the international situation more challenging for Japan, but with one key exception. Japan's most important trading partner is China and China has recently broken away from its zero Covid policies greatly enhancing its prospects for growth. Having better growth in China is more important to Japan than having better growth in Europe. Still, apart from this reintroduction of China, whose prospects for growth are still a little difficult to handicap, the prospects for global growth are getting worse as the World Bank has just cut a series of forecasts on global growth for the year ahead. The reduction slashes its former outlook for 3% growth to only 1.7% for 2023. Despite China lifting its zero Covid rules, the World Bank cut its outlook for growth in China, too, from 5.2% to 4.3%. Japan's current performance, its current assessment, and its prospects for future growth, put Japan in a very difficult position in this challenging global environment.