Economy in Brief

The trade deficit in the European monetary area fell to 47.3 billion euros in August from a 40.5 billion deficit in July. The surplus balance on manufacturing trade is reduced to €16.1 billion in August from €16.6 billion in July. Most of the deterioration in the trade balance came in nonmanufacturing trade, as the August balance on that account widened to €63.4 billion from €57 billion euros in July.

The European Monetary Union trade balance has been slipping at a very rapid rate. The 12-month average is -19.7 billion euros, over six months that expands to -€33.9 billion and over three months it's at -€40.3 billion. The three-month average is twice the 12-month average. The surplus balance on trade in manufacturing has slipped steadily but more modestly from a €22.3 billion surplus over 12 months to an €18.8 billion surplus over six months and then to a €17.2 billion surplus over three months. These are period averages of the surpluses. On the same timeline, the nonmanufacturing balances have gone from a €42 billion deficit over 12 months to a 52.7 billion deficit over six months to a €57.5 billion deficit over three months. Over the broader sequential period, just as over the last several months, the deterioration is mostly in nonmanufacturing trade pointing the finger at commodities and the increase in commodity prices and particularly the price of energy goods internationally.

Not surprisingly, this trend is built on a weakening trend in exports and a withering trend in imports as well, but with export growth rates much lower than import growth rates throughout. Export growth rates transition from a 21% annual rate over 12 months 2 a 19% annual rate over six months, to a 6% annual rate over three months. For imports, there's a 51% annual rate over 12 months that stabilizes at about 52% over six months and then slides to a 36% annual rate over three months. In both cases, the growth rates for exports and imports are declining; however, the import growth rates simply swamp and dwarf the growth rates for exports.

We can look at these growth rates separately for manufacturing and for nonmanufacturing trade and while the numbers are different the trends are not particularly different.

For manufacturing trade, export growth slows from 18% over 12 months to 10.5% over six months to 7% over three months. For imports, manufacturing growth rates log 29% over 12 months, 29% over six months and 15% over three months.

For nonmanufacturing trade, export growth rates log 37% over 12 months, 64% over six months and then drop sharply to 3.7% over three months. For imports, the 12-month growth rate is 110%, the six-month growth rate is 105%, and over three months that pace steps back to a growth rate of 81%. Nonmanufacturing trade is clearly seeing nominal flows expand much faster than manufacturing trade. The action is really on the import side where the growth rates are typically twice or more the growth rates on the export side for nonmanufacturing goods. It's clear from these statistics that inflation is what's really driving the deterioration of this trade account of the European Monetary Area.

Separate country level statistics for Germany and France tell the same story although with less of a gap between the export and import growth rates themselves. For Germany, exports expand at a 14% pace over 12 months, at a 21% pace over six months and fall back to a 15.5% pace over three months. For imports the growth rate is 29% over 12 months, 33.5% over six months and that over three months imports fall very sharply and leave their growth rate below that for exports at a 6.4% annual rate. For France, exports grow at a 20.9% annual rate over 12 months, at a 6.1% rate over six months and at a 15.3% rate over three months. For imports, the 12-month growth rate is 30.9%, over the six months the growth rate is 25.1%, and the three-month growth rate at 19.5% is only a few percentage points above the growth rate for exports.

Other European growth rates focus on exports. In the table, we have growth rates for Finland, Portugal, and Belgium. These export growth rates generally fall from about 30% over 12 months, down to a pace about 25% over six months. And then over three months, in Finland export growth declines at a 7.1% annual rate, in Portugal exports decline at a 16.1% annual rate and then Belgian exports expand at a 3.2% annual rate over three months. Export growth clearly slows in all three of these countries- exports decline over three months in two of them. We see evidence in these flows of weakening demand globally against the earlier EMU, French and German evidence of still strong nominal import demands.

For the U.K., a different picture emerges, with exports having a 27% growth rate over 12 months, a 58% growth rate over six months and a 24% growth rate over three months. U.K. imports grow at a 29% pace over 12 months, faster than exports, but then slip sharply with 10.7% annual rate over six months and then slip again for 1.1% growth rate over three months. These figures reflect the slowdown in the U.K. economy and the onset of recession. There is going to continue to be slowdown for demand in the U.K. market. There's also a sharp weakness in the pound sterling on the foreign exchange markets that will affect U.K. trade flows in the near term. However, with the possibility of a J curve effect operating in the short term, we might not see that in the next few months data, immediately, but further U.K. trade improvement should play out over the next six to 12 months.

If there are any inflation deniers out there, it is well past time for them to 'man the lifeboats' and make an emergency evacuation from this point of view. Inflation is raging and is accelerating sharply. In Germany – once a paradise of solid price stability- inflation over 12 months is 11% rising, at a 10.6% pace over six months -barely indicating any abatement, and then jumping to a 16.2% annual rate over three months. These are not just accelerations of inflation from a depressed base. One year-ago the German HICP was up by 4.2% year-over-year. At the time, people were arguing that inflation rate was distorted. Ha! Little did they know…

Of course, Germany is not in control of its own inflation rate anymore the way it once was because it's part of the European Monetary Union and tied into this basket of countries that has different inflation tolerances and different economic and fiscal arrangements as well.

EMU is what it is... The European Monetary Union is a monstrosity formed based on an idea by Robert Mundell on something he called an 'optimum currency area (OCA).' And like many things in economics, this concept was used to justify the formation of a 'European Monetary System' even though the members of this system do not qualify as an ideal OCA based on the criteria that Professor Mundell had set forth for such a union to be successful. For one thing, in their zeal to have a common currency, Europe was never ready to pull its fiscal fortunes together. There is no overarching fiscal policy as each country runs its own fiscal house although there are rules that can be used to bring countries back to fiscal morality when they stray. The reality, however, has been that it is only in the wake of Europe having employed this rule to discipline fiscal laxity that countries were put under severe stress and pressure and the European Central Bank eventually was pressed into service to make policies that have been far more inflationary than anyone would like to sustain the union.

German inflation and recession The German domestic inflation rate is officially put at 10% and there's a new record pace of inflation since Germany has been reunified. But for those of you who remember history, we know that Germany has suffered far worse inflations than this as Germany's hatred of inflation stems back to its pre-War era of hyperinflation. The Bundesbank now looks for Germany to enter recession and it also recognizes that inflation is too high, and it urges - and expects - the ECB to be raising rates by another substantial amount at its next meeting. However, quite clearly the toothpaste is out of the tube. The Bundesbank argues that the economy will suffer a recession, but it will not be a severe recession. That's a curious argument. When we combine the notion of recession in the German economy with the ECB raising interest rates sharply, and with the energy shortages being experienced, it's hard to know why the Bundesbank would want to stick its neck out to say that the coming recession would be relatively mild. It seems that the risks are for relative severity.

Inflations in Germany is broad – not isolated or concentrated Inflation diffusion for in Germany in September shows inflation went up across about 59% of the categories; this is a sharp acceleration from August where it went up in only 31.8% of the categories; in July it went up in only 9.1% of the categories. During these three months, Brent oil prices measured in euros fell by 5.3% in September, by 6.8% in August, and by 7.3% in July. We know that oil prices don't get into the CPI index immediately, but this has been a period in which oil prices are falling. In fact, oil prices fall on balance over six months and over 12 months. Yet, the inflation statistics for Germany are ugly

The inflation diffusion across categories over three months, six months, and 12 months shows inflation extremely broad on the order of 70% to 80%. That means over those time horizons inflation (annualized) is rising in 70% to 80% of the major CPI categories. Specifically, I calculate diffusion as derived from the three-month percentage change compared to the six-month pace and then the six-month pace compared to the 12-month pace, and then 12-month pace compared to the pace over 12-months in the comparable month of one year-ago. On all those comparisons prices are broadly accelerating across CPI categories.

Core inflation accelerates Core inflation for the HICP rises from 6.3% over 12 months to a pace of 8.4% over six months to a pace of 12.6% over three months - those are all annualized rates and they're all extreme. The domestic CPI excluding energy accelerates from 6% over 12 months to 7.8% over six months to 11% over three months also showing sequential acceleration, the same message as from the HICP core.