Economy in Brief

Japan’s Tankan in the third quarter slipped to +8 from a reading of +9 in the second quarter. The headline most closely followed by Japanese investors and economists is the reading for large manufacturing firms. That index had previously slipped from 14 in the first quarter of 2022 to +9 in the second quarter; the third quarter extends this trend slippage that dates to peak readings of +18 in the third and fourth quarters of 2021. On data back to 2004, the manufacturing reading for the third quarter has a 48.5-percentile standing, putting it just below its median on that timeline.

By comparison, the nonmanufacturing reading rose to 14 in the third quarter from 13 in the second quarter; it had been as low as +9 in the first quarter of 2022, the same level as in the fourth quarter of 2021. The nonmanufacturing trend has been on an improving run while manufacturing has been under deteriorating run in Japan. The nonmanufacturing sector has a 51.5 percentile standing on data back to 2004, slightly above its historic median.

Looking across sectors in the report the nonmanufacturing area shows some significant industry improvements. Within nonmanufacturing, in construction and real estate there are monthly improvements. Improvement in wholesaling is modest on the month. There is substantial improvement in transportation, a slight improvement in services for businesses and a slight improvement in restaurants & hotels that still have a net negative reading but showed less of a negative reading in the third quarter. Deteriorating sharply quarter-to-quarter were personal services that fell from a +18 in Q2 to a +2 reading in Q3; however, that had been a negative reading in the previous two quarters (Q4 2021 and Q1 2022). Also weakening in the quarter is retailing; that industry fell to a reading of +3 in Q3 from +7 in Q2: it had only been at +2 in the first quarter and was at +3 in Q4 2021, so this is a return to retailing roots around the turn of the year.

On the positive side, construction and real estate both have 51.5 percentile standings over this period. Transportation has a 60.6 percentile standing; services for businesses have a 78.8 percentile standing, with wholesaling at an 87.9 percentile standing. Below median readings exist in retailing, restaurants & hotels, and personal services.

Medium-sized enterprises The Tankan also extends to smaller companies although these readings are not considered to be critical as bellwethers in this survey. However, for medium-sized manufacturing firms the Tankan in the third quarter was zero, the same as in the second quarter, down from stronger first quarter and fourth quarter readings. At the zero-percentile mark, the medium firm manufacturing standing is at the 33.8 percentile mark. Nonmanufacturing, however, has been improving for medium sized companies, moving up to a +7 reading in the third quarter from +6 in the second quarter and zero in the first quarter of 2022. Nonmanufacturing has a 60.8 percentile standing. The outlook for manufacturing for medium-sized companies slipped to -4 in Q4 2022 from -3 in Q3; that compares to a +1 reading in Q2. The standing for this reading is in its 33rd percentile- a weak reading in historic context. Nonmanufacturing showed an improvement in the outlook to +2 in Q4 from +1 in Q3 compared to -3 in Q2; it has an above median, 53.3 percentile standing.

Small enterprises Small enterprises also are surveyed. Small manufacturing firms registered another -4 net Tankan reading in Q3 2022, for the third quarter in a row. Their standing is in their 46.7 percentile of their historic queue of data. Nonmanufacturing for small enterprises improved to +2 in Q3 from -1 in Q2 and -6 in Q1. Nonmanufacturing has a queue standing that is firm at the 73.3 percentile mark. The outlook for manufacturing stayed at -5 for small manufacturing enterprises in Q4 2022, the same as in Q3 and Q2. This reading, however, has a 52-percentile standing; it is still above its median. Nonmanufacturing saw an improvement in the outlook to -3 in Q4 2022 from -5 in Q3; it previously was -10 in Q2, and the Q3 reading has a 69.3-percentile standing in its historic queue of data.

Inflation in the Euro Zone continues to move ahead fast enough to churn up a cloud of dust. In September, the flash HICP for the monetary union rose by 1.1% taking the 12-month increase up to a 10% pace underlining the problems of inflation that lingers in the European Monetary Area. The September figure was an escalation from 0.6% increase in August in a 0.7% increase in July. However, all those numbers are excessive compared to the inflation target of around 2% at the ECB runs.

Sequentially inflation's trend is still somewhat ambivalent at a 9.7% annual rate over 3-months, up from an 8.3% annual rate over 6-months but that's down from the 10% annual rate over 12-months. The trend for inflation is not cemented, however, these three growth rates for prices are all exceptionally high and the 3-month inflation rate does exceed the 6-month inflation rate leaving little for optimism as far as the inflation trend is concerned.

In Germany, the inflation rate rose by 2.4% in September from a 0.8% increase in August and after a 0.6% increase in July. The sequential growth rates for Germany show a 16.2% annual rate over the recent 3-months up from a 10.6% pace over 6-months and that compares to an 11% annual rate over 12-months. Inflation in Germany has really heated up and stayed hot.

Some deceleration outside Germany For France, inflation was flat in September; it rose by 0.1% in August, and by 0.5% in July. The sequential growth rates have disinflation in play with prices rising at a 6.2% pace over 12-months, falling off to a rise at a 5.3% pace over 6-months and down to a pace of 2.5% over 3-months. France shows clear deceleration in the pace of headline inflation.

Prices in Italy rose by 0.6% in September, the HICP index gained 1.2% in August and 0.2% the month before that, in July. Italian sequential inflation also is deflating as annual rates of increase progress from a 9.6% pace over 12-months to a 9% pace over 6-months to an 8.4% annual rate over 3-months.

Spanish prices backtracked with the HICP price index falling by 0.5% in September after rising 0.3% the month before and 0.9% the month before that in July. Sequentially, Spanish inflation is also decelerating; it cooks at a 9.3% annual rate over 12-months but then slides to 4.3% pace over 6-months and runs at a 3.2% annual rate over the most recent 3-month period.

Environmental factors Apart from the headline and, apart from Germany, there are clear signs of inflation decelerating in the European Monetary Union. And that's probably because growth is slowing down and because there are concerns about energy availability as well as uncertainty over the ongoing war in Ukraine. There are lots of things to worry about to undermine confidence. Consumer confidence has weakened sharply in countries that have released early consumer confidence figures. Most importantly, commodity price pressures are easing. The situation in Europe is difficult and we also see it in the currency market where the dollar has been rising strongly against the European currency, the euro, as well as against the British pound-that has its own special problems.

The EU Commission index for EMU in September fell to 93.7 from 97.3 in August. This is another sharp monthly drop as the index has fallen to its 26.7 percentile. That means the index has been weaker than this only about 26% of the time.

All the sector assessments in the month have weakened. The industrial reading fell to zero from +1, consumer confidence fell to -28.8 from -25, the retailing reading fell to -8 from -7, construction fell to + 2 from +3, and the services reading fell to + 5 from +8.

The percentile standings for the sectors are low as well; the industrial sector reading is firm with a 70th percentile ranking. The one strong reading on the table is for the small construction sector which has an 87.4 percentile ranking. Retailing comes in with a ranking above its median at 53.0. However, the consumer confidence ranking shows that that index is at the weakest level that it has seen on this time horizon. And the all-important services sector that is the major job creator has the 37.8% standing, well below its median. Rankings below their 50% mark are below the medians for each of these rank metrics.

An assessment of changes across all EU members shows that declines in the last three months have been extremely broad-based with a month-to-month increase being the exception rather than the rule. Only three countries showed month to month increases for their overall indices in September, in August only two showed increases and in July only three showed increases -this among a total monthly count of 18 changes The country rank standing is extremely weak as well. Only Greece and Cyprus have country level indices with standings above their historic medians (above 50%). All the other countries in the table show EU index readings that stand below their historic medians. This is widespread weakness. Nine countries have ranking below their 20th percentile. Another seven are below their 40th percentile (and above their 20th percentile).

In addition, all countries show changes in their EU indices that reveal weakness compared to their January 2020 levels before the COVID virus struck. All the sector metrics how below their January 2020 levels except for the industrial sector that is higher by 5 points. The overall EMU metric is lower on balance by 11 points.

Pooling all these signals together, what we see is an area in which the index standings are weak. They are weak across the board for nearly all countries. Readings are weak or moderate in most sectors. The readings are extremely weak in the job creating sector. And there has been substantial weakening in recent months.