Economy in Brief

The European Monetary Union (EMU) reached a peak unemployment rate of 11.7% early in the 2013 period. Since that point, the unemployment rate has been declining steadily, consistently across the European Monetary Union in the wake of the global financial crisis. And then COVID struck early in 2020; with COVID in play, the unemployment rate jerked back up to a peak of 7.8%, but has since returned to its downward path, and in fact, is carving out new lows. The unemployment rate in the EMU fell in March to 6.8% from 6.9% in February. The ongoing decline is good news and if it weren't for the virus, we would be on an extended long glidepath to lower rates - of consistently declining unemployment rates across the euro area.

However, in March there are some indications that the worm is starting to turn. March brings with it an increase in the rate of unemployment in four of the earliest members of the European Monetary Union: Spain, Ireland, Greece, and Portugal. All report increases in their unemployment rate in March. In Spain, the unemployment rate ticks up by one tenth of one percentage point to 13.5% from 13.4%. In Greece, it ticks up by one tenth of one percentage point to 12.9% from 12.8%. In Portugal, it ticks up by one tenth of one percentage point to 5.7% from 5.6%. But in Ireland, the unemployment rate rises to 5.5% from 5.2%. These are mostly small increases in the unemployment rate, perhaps no more than technical adjustments. However, Spain, Ireland, and Greece also post increases in their unemployment rates over the last three months. Ireland logs an increase in its unemployment rate over six months as well.

For the euro area as a whole, unemployment rates are continuing to fall, and these four countries are anomalies of sorts - but there are four of them - and these are among four of the weaker economies that are more likely to show economic distress sooner if conditions are changing. Consider them as the canaries in the coal mine…

Global conditions continue to be under a great deal of strain. The COVID virus is still circulating and creating issues that are being handled differently in different countries. Infections have spread, but that hasn't always increased hospitalizations or increased hospitalizations in a way that is alarming. There are ongoing dislocations stemming from when the COVID crisis is more severe, through its impact on supply chains. These are still being repaired. And even as these are being repaired, the supply chains are still being challenged anew by war in the Ukraine and by the economic sanctions that have been imposed on Russia. Russia seems determined to escalate the conflict and to intensify the combat if it can find the right cover to do so. The sense of risk is palpable.

Russia has started to cut off gas supplies to some of its customers in Europe; so far Bulgaria and Poland are on that list. Hungary, a country that tends to foster closer relations with Russia, has agreed to make its energy payments in rubles and has met with favor from Russia. It does not face the threat of having its energy cut off. However, even Germany is now making plans to decouple itself from the great intravenous pipeline flowing from Germany bringing the life blood of energy to its economy.

The European Monetary Union has seen the overall unemployment rate fall by 1.4 percentage points over the last 12 months; the number of unemployed in the monetary union has fallen by 14.6% and fallen by about the same amount (by 15%) in the larger group, the EU.

Unemployment over the last year has fallen the most sharply in Greece by 3.9 percentage points, in Austria by 2.4 percentage points and in Ireland by 2.2 percentage points. Unemployment has fallen by less than one percentage point in Portugal and France, and by one percentage point in Germany. The unemployment rate over the last 12 months is higher by one percentage point in the Netherlands.

China continues to post weak and weakening PMI numbers in April. The manufacturing index fell to 47.4 in April from 49.5 in March. This marks the second month in a row that the manufacturing index is below 50, indicating that manufacturing activity is contracting in China. China's nonmanufacturing index fell extremely sharply to 41.9 from March's 48.4. This is also the second month in a row that nonmanufacturing (an amalgamation that includes the services and construction sectors) shows a decline in activity for that joint sector.

The drop in manufacturing in April was relatively sharp. Over the last 15 years, there are only ten months in which the manufacturing index fell more sharply in one month than it did in April. Nonmanufacturing fell by 6.5 points in April, marking it as the second largest decline in the history of this index going back to 2007. The largest nonmanufacturing decline came when COVID struck in 2020; in February of that years the manufacturing sector fell in one month by 24.5 points...of course, it also rebounded by 22.7 points the very next month.

These statistics tell us that the ongoing assessment of these two sectors in China is weak and that the near-term weakness has become more intense. China continues to suffer some great difficulties on the economic front because of its decision to continue to pursue a zero COVID policy. The zero COVID policy refers to a policy goal in China to eliminate COVID. China has no tolerance for any infection whatsoever.

While the rest of the world is learning to live with COVID and with infections, to manage hospitalizations and illnesses, as well as to develop treatments, China's policy of complete intolerance and of shutting the economy down and literally fencing people into the places that they live so that they cannot mingle with other uninfected people is having dramatic impact on the economy and creating extreme distress among people in China.

Despite the extreme unpopularity of this program, China shows no signs whatsoever or backing off it and - quite the contrary – its leaders seem to be even more committed to the goal as time passes. China is pursuing this strange strategy of lockdowns and isolations and it is employing so much testing that it has stopped administering inoculations of the vaccine.

The new strains of COVID have proved to be far more transmissive than the earlier strains of COVID but not as dangerous and certainly not as lethal as the earlier strains. This explains why the rest of the world has found that it can make some sort of peace with the virus by controlling it and dealing with outbreaks when they occur.

An added problem here is that this is the well-known coronavirus. Science knows it is a class of virus prone to developing variants. As a result of this tendency to develop changes, it has been very difficult to develop truly effective vaccines against COVID. However western medicine has discovered vaccines and treatments that were developed for the earlier strains of COVID that generally have some usefulness in combating some of the later strains that have developed even though the vaccine may become less effective overtime. The vaccines are not very 'vaccine-like' as they only can stop infection for a brief period of time immediately after inoculation. That protection wears off quickly and then, people who are double vaccinated and boosted, can still get infected- but they have less risk of extreme illness or death.

China's approach to COVID has left it with a manufacturing PMI that shows a steady slide; its 12-month average slips to a lower six-month average and to a lower three-month average with a particularly sharp plunge in April. The nonmanufacturing index also shows the same sequential set of declines that are even clearer and more substantial with an even larger plunge in April.