Economy in Brief

The U.K. economy is suddenly experiencing a world of hurt. With a new government and a budget change that was not well received and then was retracted, the financial markets have been under pressure. The Bank of England has been active trying to stabilize financial markets. However, there's only so much you can do with band aids chewing gum, and a stapler.

Transition to greater weakness The economy has transitioned into a more serious state of decline. The rate of decay makes it look like it's already in recession. In August manufacturing industrial production fell by 1.6% following declines of 1% in July and 0.8% in June. Industrial production figures are adjusted for inflation, so these are real declines and the real decline in the U.K. industrial production is now 6.7% over 12 months. IP is falling at an 8.1% annual rate over six months and falling at a 13.2% annual rate over three months. These are substantial negative growth rates, and they are accelerating and there are declines across all sectors. The deceleration in growth also is across nearly all sectors, with two exceptions. Capital goods are a very minor exception because the year-over-year fall of 8.7% slows down slightly to a 7.8% rate of decline over six months before resuming at a 9.5% rate of decline over three months. Consumer durable goods also fail to show sequential deterioration but continue to show a good deal of weakness. Consumer durable goods output declines by 4.2% over 12 months, at an accelerated 6.4% annual rate of decline over six months, but then it slows to an annual rate of decline of 1.6% over three months. However, both consumer nondurable goods and intermediate goods show sequential real declines and acceleration in the rate of those declines over six months and three months, rounding out the picture of a fast-weakening manufacturing sector.

QTD growth U.K. data trends also show quarter-to-date declines and all the sectors show manufacturing output falling. Manufacturing output falls at a 10.9% annualized rate, two months into this quarter. Consumer nondurables has the sharpest decline in its QTD growth rate among sectors at -10.1%, but intermediate goods output at -9.4% is close behind, as is capital goods within a decline at an 8.5% annual rate. Consumer durables output is falling at a 4.5% annual rate, about half the pace of decline the other sectors.

Sectors ae mostly lower since Covid struck U.K. output has fallen sharply over the past year; the table documents it's down significantly over 12 months as are all the sector measures. As a result of those declines, U.K. output is now lower than it was pre-pandemic in January 2020. All sectors except for consumer nondurables show net declines as well. Consumer nondurables output is still 5% above where it was in January 2020. Overall output shows a short of its January 2020 level by 1.3%; capital goods output is the farthest behind, at 6.4 percentage points below its output level in January 2020.

Industry weakness is broad-based The bottom of the table shows trends for five key industries in the U.K. Only two of these industries fail to show sequential deterioration. One of the exceptions is textiles & leather where after falling by 5.9% year-over-year output trends fall at only a 2.6% pace over six months but then they collapse to fall at one of the stronger negative growth rates of -21.6% over three months. In the end, which makes it not much of an exception.

Not surprisingly utilities are an exception, but they still aren't very strong. Utilities output is up by 7.1% since before Covid struck. Sector output is up by 1.9% over 12 months. Growth in the sector is moderate to weak except for the 6.4% annual rate over six months. But after that, it's back to dead flat over three months. The monthly pattern for electricity, gas & water shows declines in August and July after a significant 2.7% increase in June.

Food, beverages & tobacco are up by 10.3% on that same timeline to before the point that Covid struck. But textiles & leather output is 13.1% lower, mining & quarrying is 14.4% lower and motor vehicle & trailer production is lower by 35.2%. The bottom line is since Covid only food and utilities output have expanded.

Australian business confidence in September fell to 4.8 from 9.9 in August. It was as strong as 7.6 in July. Business conditions, in contrast, improved to 24.7 in September from 21.6 in August and 21.9 in July. Forward orders increased to 14.7 in September from 13.7 in August and 11.3 in July. Despite the one-month drop in confidence, business conditions and forward orders show improvement.

Monthly changes in the components can be erratic, but the three-month averages show a decline in business confidence. Business conditions components show declines in exports and in exporters’ sales in September and modest gains for the three-month average compared to the six-month average. September data focus on foreign weakness as an impediment.

Over both three months and six months, confidence deteriorates as conditions improve. The 12-month average compared to 12-month ago shows declines in business confidence as well as business conditions.

In September, most observations are above their historic means. The exception is the reading for confidence itself; it is a tick below its mean value. Among components exports are below to their historic mean with a -1 reading slightly below the mean of -0.8 for the period back to May 2002.

Ranking statistics show a good deal of strength. The overall confidence measure has a relatively weak reading with the rank standing in its 38th percentile. This compares to a three-month standing at its 56th percentile and a 12-month average standing in its 63rd percentile. These progressions show that as we look at more recent periods the standing of the confidence index is weaker; there has been some loss of momentum in confidence.

Business conditions are mostly strong However, among components of the business conditions reading, most rankings are in the 90th percentile and higher. The exceptions are the relatively low rankings for exports with a 41.6-percentile standing and exporters sales with the 39.2 percentile standing.

However, there are also high standings for metrics that are not favorable for the outlook: labor costs have a 98-percentile standing, purchase costs have a 97-percentile standing, and prices have a 98-percentile standing. There are strong expectations for inflation and, in addition to that, stocks have a very high 99.2 percentile standing. If stocks are full, firms are less likely to be ordering and filling up inventories further.

Still, forward orders have momentum. In addition to moving higher, their percentile standing is at the 97.6 mark in its historic queue of data. The readings on activity and inflation both are high giving rise to some uncertainty about what the future will look like.

Looking at changed comparing three-month averages to six-month average, some of the biggest changes in these components have come from improvements in trading conditions and from stocks. In contrast, orders are only up by 0.3 points over three months compared to six months, one of the weaker categories. To the extent that some of this begins to look like congestion, the good news is that capital expenditures are relatively strong; the three-month to six-month change logs a 1.6-point gain, the fourth largest among business conditions components. Firms are investing.

One of the hallmarks of this report is that business confidence has been fading and it fell relatively sharply between August and September. But its smoothed three-month moving average climbs over three months compared to six months and over six months compared to 12 months. Over those periods business conditions themselves have been improving.

Dutch industrial production fell by 2.7% excluding construction in August. It logged a gain of 0.9% in July and another of 1.7% in June. Utilities output fell by 5.8% in August after falling 4.3% in July and 4% in June - there is a much longer broad string of weakness here related to Europe’s energy problems. The weakness in utilities casts a pall over performance of the rest of the economy as well as prospects for the manufacturing sector and other sectors looking ahead. What can you do without energy? Go Green go…fight green, fight…win green… win? And now the pipeline is kaput, too.

Mining & quarrying activities saw output fall by 5% month-to-month in August after gaining 8.5% in July and falling 6% in June.

Manufacturing output fell by 2.2% in August after gains of 1% in July, and 2.6% in June. The manufacturing PMI changes for the Netherlands have seen declines in August, in July, and in June, in terms of their month-to-month changes- the level readings are still very high with the manufacturing reading still at 65.7 in August even after a series of monthly drops.

Sequential growth rates for output Sequential growth rates for industrial production in the Netherlands show some recent weakness over three months, but there is not a clear pattern of ongoing deceleration. For example, for overall industrial production excluding construction output falls at a 1.2% annual rate over three months but it gains at 6.1% pace at an annual rate over six months and that's an acceleration from a 5% pace over 12 months. Utilities output continues the dismal trend we see in the monthly data with output falling at a 27.1% annual rate over 12 months, at a 36.7% annual rate over six months, and at a 44% annual rate over three months. Mining & quarrying also show a descent into weakness with an 8.4% gain over 12 months giving way to a 6.1% annual rate of decline over six months and an 11.8% rate of decline over three months.

Manufacturing gets back to a more ambivalent trend with output up by 9.2% over 12 months, then accelerates to a 13.1% annual rate over six months, before decelerating to a 5.5% annual rate over three months. The sector ‘food & beverages’ shows declines on all three horizons and clearly demonstrates deceleration. Textiles, on the other hand, show ambivalent trends with acceleration over six months spoiling a deceleration trend. Transportation equipment output shows a clear deceleration with output down 26.7% over 12 months, falling at a 62% annual rate over six months and then falling at a nearly 80% annual rate over three months.

The manufacturing PMI Still, over the sequential period, the manufacturing PMI average for the Netherlands is higher over three months than over six months (barely even comparing averages) and higher over six months than over 12 months and higher over 12 months than it was 12-months ago. The PMI data which address breadth are showing improvement in breadth over these periods even though the strength has encountered a string of monthly weakness.

Growth after Covid Growth in the Netherlands has not been particularly robust in the post COVID era. From January 2020 before the Covid virus hit, the headline series for industrial production is unchanged. Manufacturing, however, is up by 4.2% over that period, a span of a year and one-half. Utilities output falls by 23% compared to that benchmark while mining & quarrying activity falls by 15.7% from that benchmark. Manufacturing output is higher on balance, the food & beverage sector is lower by 7.8%, textile output is lower by 2.6%, and transportation equipment output is lower by 42.8%.

Quarter-to-date growth In the quarter-to-date, the headline series maintain their momentum. Industrial production excluding construction is up at a 4.3% annual rate in the third quarter-to-date. Manufacturing output is up at 10.8% annual rate in the quarter-to-date. Textile output still strong showing a strong gain at a 15.6% annual rate; however, there is a severe negative downdraft in the transportation sector and from utilities.

Ranking Dutch IP growth rates and sector growth Ranking the various industrial production components based on their annual growth rates since 2017 put the overall IP growth rate in the top 10% of all annual growth rates seen on that period at a 90.7 percentile standing. Despite recent setbacks, mining & quarrying is also strong with a 96-percentile standing. Manufacturing has a 90.7-percentile standing. And the growth of output from textiles over the last 12-months has a 72.2-percentile standing, still a firm reading. But for the remaining sectors, there is no halfway about it. Utilities output shows the weakest year-over-year percent change on this entire timeline. The output in the food & beverage industry has been lower only about 7 1/2% of the time. The year-over-year output change for transportation equipment has been weaker only 3.7% of the time. However, as an overall measure of manufacturing, the manufacturing PMI continues to be a very strong signal logging a level at its 90.7 percentile on data back to 2001.