Economy in Brief

The UK economy has been under pressure and its politics have been under peril. Markets have a challenging time dealing with the circumstances of the economy and the policy choices made by various UK politicians in the wake of what can only be termed its Brexit fiasco. I don't know how history is going to look at the British exit from the European Union; it certainly isn't going to be something that will be applauded for its economic results. Although that wasn't the reason for doing it. I suppose part of it was a warning to the rest of Europe of how EU membership was spreading political influence through the economic union, something that wasn't supposed to happen which is the reason fiscal policies were never connected. The UK in asserting its independence and autonomy has had to foot a big bill associated with leaving as well as, find a life on its own, and construct a way to deal with Northern Ireland. That was the problem that was the death knell for Theresa May, as Boris Johnson claimed he had a solution that he did not really have. And now, a new Prime Minister is in place, to try to sort it all out all over again. Have we already seen this movie?

The backward glance Notice that the UK economy was hit particularly hard by Covid, and while the confidence numbers show that there was a recovery in confidence it wasn't lasting and there has been a leg down since then that has brought confidence to even a deeper pit than it was in during the worst of Covid. The UK consumer confidence metric at -44 has been weaker over the last 20 years only 1.3% of the time. This is an extremely rare and extremely weak reading. In November, perceptions of the household financial situation over the past 12-months picked up slightly, however, it's still weak with a 22-percentile queue standing. Over the past 12-months households assessed their financial situation as having been in the bottom 4.7 percentile over the last 20 years; the general economic situation is assessed as being in the bottom 8.1 percentile compared to all situations over the last 20 years. The performance of inflation is assessed as having been worse less than 2% of the time. The Covid ‘cure’ appears to have been worse than the disease.

Looking ahead More importantly, looking ahead to the next 12 months, the financial situation, and other metrics regarding consumer satisfaction are even worse. The household financial situation was slightly better month-to-month, still it has been worse only 1.3% of the times over the last 20 years. The expected general economic situation, which also improved slightly month-to-month, has been worse over the last 20 years 1.3% of the time. The unemployment situation expected over the next 12 months worsened in November and has a 75-percentile standing- it's been worse only 25% of the time that's a chilling metric for sure. And looking ahead at inflation, consumers find the outlook for inflation has been worse historically only about 5% of the time. Clearly consumers are concerned, and the economy has a long way to go to be put on level footing

There was little respite by income with lower income people assessing conditions as worse less than 1% of the time while upper income people assess conditions is having been worse about 6% of the time.

The UK is going to deal with this situation by implementing a policy that will be aimed at increasing tax revenue and hoping that that doesn't damp growth. Policymakers always have a hard time making a choice between doing something that they think will pay off right now and doing something that will have a bigger payoff in the future even though it's immediate payoff Cannot be quite so clear or might even be controversial.

German real orders fell by 4% in September driven into negative territory in September by a 7% decline in foreign orders while domestic orders advanced by 0.5%. Orders in August had fallen by 2% as both foreign orders and domestic orders fell, foreign orders by -1.7% domestic orders by -2.6%. In July overall orders advanced, rising by 1.3% as foreign orders were strong, rising 5% on the month and as domestic orders fell by 3.7%. Clearly this has been a period of some volatility in orders both domestic and foreign orders are swinging around rather widely. However, the preponderance of significant large negative orders is somewhat worrisome.

Turning to the sequential pattern of orders that is the percent change over 12 months and the rates of change over three months and six months, we find total orders falling at a 17.6% annually over three months, at a 12.7% annual rate over six months and by 10.7% over 12 months. Total orders are showing at clear decelerating pattern with weakness growing over the shorter time periods. Foreign order weakness, however, has been fairly steady during this sequence of time: over 12 months foreign orders fall 15.7%, over six-months they fall at a 14.2% annual rate and over three-months they fall at a 14.9% annual rate. There's no steady deceleration here but there is quite steady and quite significant ongoing weakness in German foreign orders. Domestically German orders have gotten progressively weaker and progressively much weaker. Over 12 months domestic orders fall by 2.6%, however, over six-months they fall at a 10.8% annual rate, and over three-months they fall at a 21.1% annual rate. While foreign orders are responsible for the weakness in September the trend decline in orders and the decelerating pattern itself is a function of domestic economic conditions. Today's report finalizes orders for September and that makes the quarter to date the preliminary results for the third quarter period. In the third quarter German orders fall by 6.1% at an annual rate with foreign orders rising at a 3.3% annual rate and domestic orders declining at an 18.4% annual rate. Once again, it's the domestic portion of the economy that's looking so weak.

Real sales are performing better than real orders with manufacturing sales in September rising 0.2% after rising by 1.2% in August and followed by a 2% drop in July. Sequentially sales don't trace out a particular trend but they rise by 7.4% over 12-months and they're rising at a 12.3% annual rate over six-months and then the bottom falls out and orders fall at a 2.3% annual rate over three-months.

Sales weakness is pronounced over three-months with real sales falling for consumer goods overall led by declining consumer nondurables sales that fall at a 6.4% annual rate, and intermediate goods sales that fall at a 3.1% annual rate. But capital goods sales rise at a 2.4% annual rate and within the consumer sector durable goods sales also rise by 4% but are dominated by the weakness in non durables.

Sequentially real sales show deteriorating patterns for consumer goods but the 1.1% rise over 12 months as 0.2% annual rate fall over six months and a 4.9% annual rate fall over three months this is driven by consumer non durables where sales rise by 0.3% over 12 months fall at 1.7% pace over six-months and then fall at a 6.4% pace over three months. Intermediate goods also show steady deceleration rising by 0.6% over 12-months falling at a 1.9% annual rate over six-months and then falling faster at a 3.1% annual rate over three-months. However strength in capital goods sales which rise by 17.4% over 12 months and at a 32.2% annual rate over 6-months keeps the weakness in intermediate goods consumer goods from dominating the headline for this report- especially over 6-months.

The bottom panel of the table presents order surveys for Germany and the largest European Monetary Union economies. The German industrial confidence measure from the EU Commission show steady slippage from 11 in July to 7.5 in August 4 in September France also shows slippage from -0.8 in July to -4.8 in August to -6.7 in September Italy slips from a small net positive at 0.6 in July to -1.4 in August to -3.8 in September and Spain rounds things out with not quite the same degree of slippage but with a - 4.9 July result a - 5.5 August reading and then a very slight improvement to -5.2 in September. However clearly the rule in play for Europe is that industrial confidence has been slipping from July to August to September with Spain has only a technical exception of small dimension.

The sequential reading is for the European Commission industrial confidence indicators applies to period average indices; these show the German reading at 16.2 over 12-months, averaging 11.4 over 6 months and averaging 7.5 over 3-months. Once again we have this secular deterioration. France fits into that same framework as does Italy and this time Spain fits into the framework as well. The simple change in these indicators over 12 months shows a 19.6 point drop in the German index an 11.4 point drop in the Italian index and 8.9 point drop in the French index and a 7.9 point drop in the Spanish index. In terms of the queue standings for these readings the German reading in September still has a 79 percentile standing, relatively, firm; however, France, Italy, and Spain all have standings below the 50th percentile although not by a large margin.

On balance there's a good deal of weakness in Europe there's clear encroaching weakness for sales and for orders in Germany and this report is in broad terms in line with the weakening trends we've seen from the PMI reports. The high rate of inflation, rising interest rates from the European Central Bank, are situations that are going to continue for some time. The ongoing war in Ukraine which has just showed a new dimension of risk with what may have been a Ukrainian anti-missile missile going off course and exploding in Poland showing exactly what the risks are starting to look like in Europe. Keeping the toothpaste inside the tube is going to be difficult as new investigations into drones supplied to Russia from Iran reveal that the Iranian supply chain has fingerprints on it of all sorts of western European companies who are supposed to be obeying sanctions and preventing these sorts of materials from getting into Iran in the first place. Not only are they getting to Iran they're getting into Iranian drones they're going to Russia and they are attacking Ukraine. Just another example of how hard it is to really get control of and understand what supply chains are doing in a complex global economy. I suspect this is one supply chain that's about to undergo disruption.