Economy in Brief

The ZEW Economic situation index for May fell to -35 for the euro area from -28.5 in April. The reading for Germany fell to -36.5 in May from -30.8 in April. The reading for the United States fell to 24.3 in May from 27.9 in April (these are raw diffusion scores; the table below presents percentile standings for these values). These observations are substantially lower over three months. They already had weakened over six months and their readings over 12 months already were poor. The simple summary is that very bad conditions meet poor expectations and slipping momentum for both.

Macroeconomic expectations for Germany and the U.S. continue to give deep negative readings. For Germany, the diffusion reading (not in the table) improves slightly on the month to -34.3 in May from -41.0 in April. The U.S. diffusion reading slips month-to-month to -28.8 from -24.7. However, conditions in Germany measured on a relative yardstick are not better than they are in the United States. The queue standing of the diffusion readings show the German standing in the bottom 8.5% when ranked among all German readings back to late-1991. U.S. indexes stands in the 13.1 percentile of its own data queue, slightly better, but still a very weak reading, on that same timeline. There is nothing to cheer about.

Reality check! There's nothing in this report that is reassuring or good news causing me to put the headline on this report as ‘The death of Optimism.’ It's not that anything so dramatically bad has happened this month; it's that what has been happening in this report has continued to happen and it's important to acknowledge that as well as the prospect for it to continue. The economic and geopolitical conditions that have caused these readings to come about continue in play and in fact the super support mechanisms that countries have used ranging from fiscal policy to monetary policy have been leaned on so long that these crutches have been bent to configurations that put them beyond usefulness. Fiscal measures to support economic activity have been cut or are being cut. Monetary policy assistance is being reduced and policies of restrictiveness are either in play or in train.

The lingering malaise of virus At the same time, the virus that was responsible for creating the recession and the lockdowns and the panics… continues to circulate albeit in a less fearsome form. Countries continue to make their own peace with the virus. Some, like China, continue to have severe episodic lockdowns; others all but ignore it while health officials keep a wary eye on it. The supply chains that were so disrupted during the pandemic are still disrupted; they're in the process of being fixed, but this process is a long one. Maybe this will be viewed as ‘transitory’ by historians, but not to a real-time policymaker.

Disruptions continue Global trade has been severely disrupted. There continues to be long lines at ports although there is also evidence that this situation is being gradually rectified. Many firms simply went out of business and will never return. Others have undergone severe damage and they are shadows of their former selves. Yet, others are still in business and are trying to adopt new ways of operating given the new realities of a world with a pandemic and people who are concerned- perhaps overly concerned- about the potential for its to return.

The current crisis has its own special sauce At the same time, there is a new ingredient that threatens global prosperity and that is Russia's attack on Ukraine. This attack is not only devastating for the people of Ukraine whose lives have been terminated, whose country is being destroyed, whose cities are being decimated, but there's also an adverse impact to the world from economic activity disrupting the normal flow of commerce that would come out of that region to the world. In addition, there are sanctions on Russia for starting this conflict. Some important trade flows have been lost. Ukrainian wheat shipments to the world have been impeded and halted. Russia is stealing Ukraine’s grain and stealing Ukraine's farm equipment. Russian fertilizer exports to the world have stopped and because of this global agricultural is worse off. Farmers no longer have the fertilizer that they have used in the past to enhance crop yields. The potential for a global food crisis and for much higher food prices is on the table. Yes, the crisis may be on the table, food may not be.

The summary table offers little good news A look at the summary table shows that German and the U.S. economic situations have rankings below their historic medians (below rankings of 50). Economic expectations are below their historic medians and extremely weak, to boot. We see that inflation expectations also have low standings, but that's mostly because inflation is so high forecasters are not expecting inflation to accelerate but rather to decelerate although whether inflation will decelerate to a level that is within central bank target areas anytime soon is simply a matter for speculation. To underscore that, short-term interest rate expectations in the euro area and in the U.S. are in their 90th percentiles, extremely high. Long rate expectations are high, in their 88th percentile for Germany and moderately high, in their 66th percentile for the U.S. For some reason, forecasters living with a reality of extremely high inflation and expecting short rates to move up very strongly do not have much of a long-term rate expectation for the U.S. That's a curious situation and it's not clear what theory or belief it's grounded in. Against this background, stock market expectations are well below their medians at the 2.8 percentile for the euro area, at the 1.9-percentiel mark for Germany and in the bottom 22nd percentile for the United States.

The French trade deficit slipped deeper into the red ink zone in March at €14.4 billion compared to €12.5 billion in February. The deficit has eroded gradually over the year with a 12-month average of €10.3 billion, a six-month average of €12.2 billion and a three-month average of €12.5 billion. These numbers compare to a trade deficit of €7.9 billion over the previous twelve months- a clear on-going deterioration as the chart documents.

French exports in March fell by 0.1% after falling by 3.6% in February; these compared to imports that rose by 3.4% in March after rising by 0.5% in February. Clearly trade flows are working in the past couple of months to make the deficit larger.

Sequential growth rates show more stability for exports than for imports. But that's little solace since the export growth rates are below the growth rates for imports even though the import growth rates are decaying somewhat.

Exports grow at a pace of 14.3% over three months, 15.7% over six months and 15.1% over 12 months. These are growth rates annualized over the various periods. They compare to imports where the three-month growth rate is 19.2% which is down from 39.7% over six months and lower than the 26.5% pace over 12 months. But clearly, over each of these horizons, imports are growing faster than exports and therefore each of the horizons shows pressure on the trade deficit to get larger.

Export details for France show that food, beverages & tobacco exports have been accelerating slightly from 12.6% over 12 months up to a 25.6% pace over three months. However, transportation equipment exports that fell by 0.1% over 12 months is falling at a 13.1% pace over three months. For other exports, the growth rate is hardly changed, sitting at 19.4% over 12 months and then logging a pace of 19.7% over three months.

For imports, food, beverages & tobacco imports rise by 15.4% over 12 months and by 12.2% over three months. Transportation equipment show imports falling by 0.4% over 12 months and then falling at a much more rapid 29.1% pace over three months. For other imports, the 12-month pace is 33.2%, nearly the same as the 30.7% pace over three months.

German industrial production fell 3.9% in March. There were declines in all three manufacturing sectors: consumer goods output fell by 1.5%, capital goods fell by a large 6.6%, while intermediate goods output fell by 3.8%. Construction output bucked the trend, rising by 0.9% in March.

These declines followed February where two of three manufacturing sectors advanced and January where all three manufacturing sectors advanced. Construction output has increased in each of the last three months: January, February and March.

Sequential growth rates raise more questions than they determine reliable trends. Consumer goods output is an exception to this with output rising at a 5.2% pace over 12 months, accelerating to a 10.6% pace over six months, and accelerating further to a 19.9% annual rate over three months. Intermediate goods decline on each of these same horizons, but the declines are not clear decelerations. Intermediate good output has a 3.5% decline over 12 months; that's reduced to a 1.2% pace of contraction over six months and then there is a clear step-up in the pace of decline to an annualized 10.5% pace over three months. Similarly, capital goods output trends generally show deterioration and deteriorating patterns but have a break in the wrong direction over six months. Capital goods output falls by 8.2% over 12 months and then posts a small 0.5% rate of increase over six months and goes on to log a large 29% annual rate of decline over three months.

Each of the manufacturing sectors seems to have its own trend or trajectory underway; however, these do not combine for any sense of a clear picture for manufacturing overall. Construction on the other hand shows acceleration as output falls by 0.6% over 12 months, rises at a 10.7% pace over six months then accelerates to a 30.2% annual rate over three months. Still, we are not left with a clear picture of where German production is headed.

Other horizons In the quarter-to-date (now the completed first quarter), German output shows increases in all sectors except capital goods where there's a 5.4% annual rate of decline. Consumer goods output spurts at a 19.1% annual rate and intermediate goods output increases at a 2.7% annual rate; in construction output rises at 18.5% annual rate.

Looking at these sectors since January 2020 when the virus struck, total output, capital goods output, and intermediate good output are all lower than they were in January 2020. However, consumer goods output is 3.7% higher and the output of construction it's up by 1.8% on that two-year plus timeline.

Orders and sales In March manufacturing output fell by 4.6%, real manufacturing orders fell by 4.7%, and real sales in manufacturing fell by 5.9%. These weaknesses add to the weakness in industrial production overall and point to problems with orders and demand quite apart from output. Over three months real manufacturing orders are showing clear deceleration as they fall by 3% over 12 months, fall at a 7.5% rate over six months, and then accelerate that decline, falling 12.6% at an annual rate over three months. Real sector sales make a familiar detour to slightly stronger numbers over six months; otherwise they also trace a weakening pulse. Real sector sales for manufacturing fall by 6.2% over 12 months, rise at a 2.4% annual rate over six months and then decline at a sharp 23.7% annual rate over three months.

Germany, among European countries, has been very locked into the Russian economy not only for its energy but also for commerce and with the sanctions put in place and the war going on between Russia and Ukraine, it's not surprising that the German economy is doing poorly; its orders are falling quite sharply, and sales are weak or consistently pulling back.

Industrial indicators Industrial indicators from ZEW, the IFO manufacturing survey, IFO manufacturing expectations and from the EU Commission industrial indexes all show weaker conditions in March than in February across the board. Sequential readings typically show greater weakness over shorter periods; however, the EU Commission indexes are remarkable for their stability. There is little-change in the EU Commission indexes when we look at its average levels over three months, six months and 12 months; however, we know that in March there is in this one month a substantial deviation and drop from previous averages,

Other Europe Turning to the industrial situation in other Europe, we have three European Monetary Union (EMU) members in France, Spain, and Portugal reporting early and then we have EU member Sweden reporting as well. Among these countries in March, only France shows output declines. Spain, Portugal, and Sweden show increases in output. Looking at their sequential results, output in France is accelerating from 12 months to six months to three months. The same pattern holds for Spain. Portugal starts out with some acceleration but then conditions fall off over three months with output declining at a 0.8% annual rate. Sweden also starts off with accelerating trend; it fails to produce stronger growth over three months compared to six months although it does produce another positive growth number.