Economy in Brief: July 2023

Money growth in the European Monetary Union continues to contract and the pace of contraction appears to be stabilized. Over 3 months the European Monetary Union M2 measure declines at a 1.8% annual rate; this compares to a decline of 1.9% at an annual rate over 6 months and to a decline of 0.2% over 12 months. The pace of decline has stepped up from 12-months to 6-months and then from 6-months to 3-months it has stabilized.

Credit metrics, however, continue to weaken at a faster pace. Credit to residents falls at a 1.3% annual rate over 3 months, compared to a drop at a 0.3% annual rate over 6 months and an increase at a 1.3% annual rate over 12 months. In comparison, of course, there has been much faster growth over the previous two and three years.

Private credit growth falls at a 1.1% annual rate over 3 months after logging flat performance over 6 months and rising by 1.5% over 12 months; it is more than twice that pace over the previous two- and three- years.

EMU money and credit growth assessments in real terms Money: Reassessing all these growth rates by incorporating inflation and calculating real rates of change that take out the inflation effect, leaves us with money supply growth falling at a 4.5% annual rate over 3 months, slowing from a 5.1% annual rate over 6 months, and that in turn slowed from a 5.4% annual rate over 12 months. These metrics continue the declines in real balances reported over two years and three years. However, over two years and three years, the rate of decline is at a slower pace than it has been recently. On balance, there is a slight slowing in real M2 growth; at this point, it's still only slight backing off and the 3-month growth rate is still -4.5%.

Credit: The profiles for credit growth are more mixed with credit to residents falling at a 4% annual rate over 3 months following a 3.5% annual decline rate over 6 months and falling at a 4.1% annual rate over 12 months. All of these are faster declining growth rates than the declines over two and three years. Private credit shows much the same kind of pattern with a 3.8% annual decline rate over 3 months, a slightly reduced 3.3% decline rate over 6 months but then a stepped-up 3.9% decline rate over 12 months. These compare to lesser rates of decline over the last two and three years.

The bottom line for the European Monetary Union is that money and credit growth is slow or slowing when recast in terms of real balances or real credit. Declines appear to be a little bit flatter and there appears to be some modest deceleration underway. However, in the big picture, we still have money and credit declining and so these are contractionary policy forces that add to the European Central Bank’s rate-hiking way.

IFO climate is changing…for the worse! The IFO climate gauge for Germany weakened month-to-month but the all-sector reading fell to -18.2 in July from -14.7 in June. Current conditions also stepped back in July with the all-sector reading at 8.1 compared to June’s 13.5. The expectations index weakened marginally with July falling to -25.0 compared to June’s -24.3. The IFO survey falls over each of the three broad categories and the weakness in each category is shared across each one of the industry components. There are five separate industry readings for the three survey concepts implying 15 observations overall for July. Among the 15 observations, all of them weaken month-to-month except for retailing under current conditions and services under expectations.

The chart tracks a wild IFO ride The chart shows the roller coaster ride that the IFO survey concepts have been on since COVID struck. 2020 brought a sharp down move to each of the three IFO concepts of climate, current conditions, and expectations. They rebounded through mid-2021 and then underwent a slight deterioration until early 2022 when Russia invaded Ukraine. At that point, another relatively steep drop in the components was recorded, taking some of them back down to lower readings than had been experienced in the depths of the Covid situation. However, after bottoming out in late 2022, these industry metrics staged a recovery into early 2023 and now that recovery is giving way to a series of weaker readings over the past three or four months depending on which of the IFO concepts we track.

Climate Climate weakens broadly with weaker reading in July than in June across all the categories and with net negative readings in all the industries except services; that industry posts a +0.9 reading but still marks a decline from its value in June. The queue rankings of these readings are telling, with all the industry level rankings below their respective 50th percentiles, marking them as below their historic medians back to 1991. The all-sector climate reading has an 11.7 percentile rank, marking it as weaker less than 12% of the time; among industries the strongest reading is construction with a 40.5 percentile standing and in retailing with a 32.7 percentile standing- and those are both weak.

Current conditions The current conditions index fell month-to-month to 8.1 in July from 13.5 in June. It weakens across all industries except retailing, where the July reading of -2.3 is stronger than the June reading of -4.0. However, the rankings for the current index are weak; two of them are above the 50th percentile: retailing has a 65.7 percentile standing and construction has a 60.6 percentile standing. Manufacturing, wholesaling, and services all have standings below the 50th percentile but the all-sector current index is clocking an 18.8 percentile standing. Interestingly, the 18.8 percentile standing appears relatively strong compared to the sector rankings: there's only one sector standing slightly weaker than that (services at 17.3%). But this phenomenon reflects the unusual coincidence of all the industries being relatively weak at the same time.

Expectations While the current index in July shows firmer readings than either the climate or the expectations sectors, the fact that the current economy is least impacted is only one aspect of the German situation. The counterpart is that expectations are extremely weak as the all-sector reading for July has a 6.3 percentile ranking with manufacturing at a 3.5 percentile ranking and with wholesaling at a 2.7 percentile ranking. The strongest sector ranking in July comes from services with an 8.7 percentile ranking. Deterioration is across the board except for the services sector that has a -14.1 reading in July, slightly higher than its -15.4 reading in June. However, the weakness and expectations are clear, severe, and broad.

Flash S&P PMI survey data for July show broad weakening across the large industrial countries that are early reporters to this survey. Germany and France show month-to-month weakness in their composite indexes as well as both components; this weakness is echoed by the European Monetary Union aggregate that weakens in its composite as well as in its two components. The U.K. shows a weaker composite and weakness in its two components; Japan shows an unchanged composite with slightly weaker components. The U.S. shows a weaker composite with weaker services reading juxtaposed with a stronger (but still contracting) manufacturing reading.

Return of the downtrend The chart at the top shows that revival had been in play for the services sector but now that is in the past; services, clearly, for several months, have returned to a downtrend. Manufacturing remains on a steady, slow, but clearly deteriorating path. At the end of 2022, manufacturing went through a brief episode when declines abated; the index stabilized. But it's now clearly back on the move and in the ‘weakening’ category.

Sequential patterns in data The sequential patterns in the data in recent months show a clear tendency to weaken in the month-to-month changes across all the sectors in all the countries among the early reporters. There are six countries and three readings for each. Among the 18 readings, in May seven show period-to-period strength, in June only one reading shows strengthening, in July only manufacturing in the U.S. strengthened while in Japan the composite was unchanged. The encroachment of weakening conditions is clear.

The ebb and flow; flows then ebbs Over broader 12-month to 6-month to 3-month horizons, the opposite trend to strengthening conditions is still more common. These calculations are from averages on only finalized data, meaning the data are up-to-date though June. Of 18 readings, 12 show strengthening over three months, 13 show strengthening over six months and only 2 show strengthening over 12 months compared to 12-months ago. The table most clearly shows a transition for trends is progress. From 12-month to 6-month and 3-month, a rebound is in progress through June data. That is turning to decay in the more up-to-date monthly data. These trends correspond well to the various reports we have seen that have shown resiliency in economies despite central banks globally hiking interest rates.

Opinions vs. facts Whatever your mindset, still worried about recession, thinking central banks have done too much, or not enough, the data show a weakening in progress following unexpected strengthening. The queue standings that rank the PMI diffusion levels over a span since January 2019, shows all readings are below their respective medians on this timeline except Japan, where the composite and service sector readings are still relatively strong.

Rankings mostly range from weak to much weaker The average composite ranking in the table is 32.1%. The average manufacturing ranking is 8.4% and the average services sector ranking is 41.8% (all below 50%; all below their respective medians). The EU and Germany are logging their weakest manufacturing readings of the period while the French and U.K. manufacturing sectors log lower 2-percentile standings. Manufacturing is clearly and broadly exceptionally weak. Services rankings range from an unusually strong 86-percentile in Japan to the 35th percentile in the EMU and in the U.S. Yet, only the services sector in France has a raw diffusion value below 50, indicating sector contraction. And France has been buffeted by a series of labor and political actions that have interrupted activity.