Economy in Brief

The German trade surplus has generally been withering over the past year or so, but in January it has made a reversal and started to improve slightly. Nominal imports fell by 4.3% in January, dominating the trend for the trade account in the month. Exports also fell by 3.1%, but the bigger drop in imports caused the trade surplus to get larger. January was a race to the bottom and imports won.

Sequential growth rates tell an uneven story with exports growing 7.6% over 12 months. The pace slows to 3.4% over six months, then exports go stagnant with no-gain over three months. That part of the story is clear enough and it's an ongoing export deceleration. But for imports, the growth rates have been stronger and relatively steady at 22.1% over 12 months, at 20.4% over six months, then falling sharply to 12.6% over three months. But paired up against the export growth rates, imports are stronger by a wide margin on each of those horizons. And despite the sharp deceleration in import growth over three months, imports still are quite a bit stronger than exports over three months.

Much of what we see in these trends is related to price developments. We can make a comparison by looking at nominal versus real trade flows. However, to do that we have to look at data that are lagged by a month, since that is the most topical real trade flow data we possess. On that basis, exports appear much firmer, rising at a 12.1% pace over 12 months, at a 12.8% pace over six months, and culminating at a 31.7% pace over three months. Although those are enlivened flows on data updated through December (one-month lag; see shaded cells in the table), compared to imports they're still the weak ones. Imports are up at a 24.8% pace over 12 months, at 25.4% pace over six months and at a 59.1% annual rate pace over three months. Nominal import data continue to dominate export data even when we lag them by a month period and when exports 'wake up.'

We look at the lagged nominal data so we can compare them to the real flow data which are available topically only through December. Real flow data lagged one month show exports are up by 1.1% over 12 months, falling at a 0.7% pace over six months and then rising at a 15.8% pace over three months. Those flows compare to imports where lagged real imports are up by only 0.7% over 12 months and are lagging exports that are up by 1.1% over 12 months. Real imports fall by 1.2% over six months, again putting exports on stronger ground since they fall by only 0.7%. Real exports pickup to grow at a 15.8% rate over three months, but real imports pick up by more and reach a growth rate of 21.3% putting imports back in the lead.

Taking price out of the equation puts exports and imports on a much more even footing for growth. However, prices are in the equation. Rising oil prices and commodity prices have been part of the problem in this cycle and we can see that's one of the main forces that has been dogging the German trade deficit. Its pattern of deterioration reverses this month, not on revived exports but on weaker imports.

The PPI gain is strong The PPI in the European monetary area rose by 4.9% month-over-month in January. In December, the PPI rose by 2.7% m/m. The rate of growth for headline producer price inflation in the European monetary union is up at a 42.2% annualized rate over three months; that's an acceleration - but barely an acceleration- from its 40.6% annual rate increase over six months. Year-over-year producer prices are up at a 30.5% annual rate. These rates of growth compare to an inflation rate one year ago for the PPI that was up year-over-year at a 0.2% annual rate. This is a stunning and broad acceleration. Inflation is high… inflation is rising… inflation is accelerating broadly… and central banks, generally, still are waiting to make their first moves to head it off at the pass. That, at least, is true of the ECB and the Federal Reserve.

The PPI gain is broad Statistics and acceleration show that the PPI is accelerating in about 38% of the EMU members (and others in the table) in January compared to December whereas in December it increased in about 50% of them compared to November. Over three months inflation is accelerating in 46.2% of them; over six months it is accelerating at 61.5% of them. Year-over-year it's accelerating in 100% of the currently reporting members and others in the table. One year ago, even though inflation was much lower, it also was broadly accelerating with 78.6% of the reporters in this table showing inflation higher. While inflation continues to increase broadly and accelerate widely, the increase in Brent oil prices carries on, but oil has been steadily decelerating. The push for inflation to show more broadly cannot placed at the feet of rising oil prices. This leads us to see inflation as becoming more deeply embedded in the economy apart from oil.

Table 1

In February, manufacturing PMI results are mixed with 7 out of 17 reporters showing results that are worse than they were one month ago. Over three months nine countries or regions show worse PMI values than they had six months ago; there is net deterioration over six months. However, over 12 months all reporting areas except one show results superior to what it was 12-months ago with the exception being China.

The table shows mixed momentum over three months and six months. But the queue or rank standings show that by and large conditions are still relatively firm across most of the regions for manufacturing. Only three countries have percentile standings of their PMI gauges below 50%; those are Mexico, China, and Russia. Turkey sits on the fence at its 50% mark. Queue and rank standings at 50% reflect the midpoint for each series. For the most part, countries have firm-to-strong readings for manufacturing well above their midpoints. These results are quite solid when compared to their recent history over the last four-plus years.

The table also shows changes in manufacturing PMIs since January 2020 before the virus struck. What we see is only the euro area and Germany have double-digit improvements over this period. After that, the biggest improvement that we see comes from the U.K. at eight points and then a number of countries in the five-to-six-point gain region such as France, the U.S. and Canada. Showing weakness over this period; i.e., a decline -a weaker PMI gauge in February 2022 than in January 2020- are Mexico, China, Russia, India, and Turkey. That weakness indicates that there is still a significant risk in countries that have had no improvement in manufacturing PMIs in over two years and in countries where PMI stands are still low.