Economy in Brief

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.

Consumer climate on the GfK measure for Germany, a forward-looking estimate for confidence in October, shows a drop to -42.5, a new low in the series that dates to early-2002. GfK confidence has been dropping sharply and consistently from -27.7 in July to -30.9 in August to -36.8 in September and finally to -42.5 in October. This deterioration is coming in the face of ECB rate hikes, stubborn high inflation, threatened energy supplies, and the ongoing war between Russia and Ukraine. The recent drop reflects a more complete reaction to the shutting of the energy flow through the Russian Nord Stream pipeline. However, there may be even worse pipeline news ahead. A day ago, an undersea rupture in the pipeline that is being called an act of sabotage or terrorism, has created an undersea leak that may more thoroughly cripple the pipeline and nullify its capabilities for some time to come.

The components of the GfK index are released with a lag of one month. GfK reports values for September as the most up-to-date readings for components. Economic confidence fell in September to -21.9 from -17.6 in August. It was a strong as -11.7 in June.

Income expectations weakened even more sharply, falling to -67.7 in September from -45.3 in August. This reading had been as strong as -33.5 in June.

The consumer's propensity to buy reading also fell in September to -19.5 from -15.7 in August. Its June value was -13.7. The slippage on the buying gauge has been much more measured than for other GfK components.

Standings among components The economic gauge stands in its 6.4 percentile. Income expectations are at their all-time low on data back to January 2002. The propensity to buy reading is down to its 17.7 percentile standing, the highest standing of the lot, but still an exceptionally low reading that has been lower historically less than one-fifth of the time.

Successive new lows for GfK The last six monthly headline GfK values have set successive new lows in for that index. Clearly, this is a period of severe confidence weakness on data back to 2002 – a period that contains the Great Recession as well as the brief but sharp negative impact from Covid.

Elsewhere in Europe Germany is not alone in this weakness. Confidence gauges for Italy, France and the U.K. also weaken in the most recent month- that reflects data up to date though September. In Italy, the confidence index fell to 94.8 from 98.3 in August. In France, confidence fell in September to 79.1 from 81.9 in August. The U.K. index fell to -49 in September from -44.0 in August. Evaluated on the same timeline as the German GfK headline back to 2002, the Italian reading stands at its 18.1-percentile, the French reading is at its 0.4-percentile, while the U.K. measure is at a new low on this timeline.