Economy in Brief

GfK's projection of Germany's consumer climate in March finds a drop to -8.1 in the index from -6.7 in February. February had increased slightly from January (-6.9) which had worsened considerably, falling 5.1 points from its December value. The current string of four negative readings follows two positive readings in a row in October and November of last year. In some sense, Germany is having a relapse. The March reading is the weakest reading for consumer climate since May 2021, ten months ago.

The GfK index cratered at -23.1 in May 2020 and had a second downdraft in which it bottomed at a level of -15.5 in February 2021. The German economy has been on the virus rollercoaster, and it looks like the ride is continuing.

Further details on the German climate situation expand on readings for expectations for the economy and for income expectations as well as look at the current buying climate. These readings lag the headline by one month.

The economic situation improved in its most recent observation for February, rising to 24.1 from January's 22.8. The February reading is above its January and December levels, but it is below all readings from May 2021 to November 2021.

Income expectations also for February backed off sharply, falling to 3.9 from January's 16.9. The February reading is below all expectation readings since February 2021. The last three months seem to represent a more striking drop compared to the earlier values.

The buying climate also eroded in February. It fell to 1.4 from January's 5.2. It was also lower in December for that single month and was previously lower for a single month also in January 2012. It has not been lower except for one-off monthly readings since December 2008 that ended a 16-month period of greater weakness during the global financial crisis when the reading was persistently weaker. That means the current propensity to buy reading is at an unusual point of weakness.

The percentile standings for the March headline and the February components tells the story in stark quantitative terms. The headline ranks as lower only 2.5% of the time- that is extremely weak. The economic expectation reading, at its 74.1 percentile, a much more solid position and well above its median. Income expectations, however, are weak at a 32.2 percentile standing placing them in the lower one third among all their historic readings. The propensity to buy at a 27.5 percentile reading also is in the lower one-third of all its historic readings.

German data are somewhat at loose ends as we get to February and March as the IFO index released yesterday, and with more detail today, shows a good deal of variance across sectors. The Markit survey has showed a step down in German manufacturing and a sizeable step up for services in February. The improvement in services is in sync with Germany's infection roll-off but the roll-off is gradual and while services improve in February climate erodes in March.

The outlook for the period three-months ahead (made as of February) in the fresh IFO release shows strength across the board in activity and orders in manufacturing and in orders for retailing at a rank standing in the 90th percentile – extremely strong. The lowest standings in the three-month outlook are from exports with readings in the 55th to 75th percentile on data back to 2002. Apparently, businesses and industry in Germany are more confident than are consumers.

In other European economies whose data only are updated through January, we find some weakening in confidence for Italy, France, and the U.K. Still, Italy's confidence has a 90.2 queue percentile standing, France has a 68.5 percentile standing, and the U.K. has a 28.1 percentile standing.

The IFO business index climate readings all improved in February; the aggregates improved for current conditions and expectations as well. In fact, the lone monthly set back was to expectations in the construction sector.

Climate readings stand above their pre-Covid (January 2020) level overall for manufacturing and in wholesaling. It is hard to see where the rebound has come from since it is not in any obvious way virus-related. In Germany, the infections rates continued higher through January, peaking in the second week of February and coming down slowly. The death rate curve, which is known to lag., reached a local low point in late-January and early-February but has since risen slightly. So the German revitalization either represents some autonomous increase in activity or it reflects less fear of the virus by the German population. The services reading for Germany in climate, current conditions and expectations all stepped up on the month, but also rising sharply was the Markit reading on the services sector. This is the sector that tends to respond the most to changes in the virus and we can expect that it also will be the litmus test for economic responses drive by changes in attitudes toward the virus.

However, retailing, while improving, is also a lagging sector in the IFO framework that needs to improve to play catch-up. This limits the conclusion that the changing attitude on the virus may be driving these responses. Retailing climate did gain substantially month-to-month, but current conditions only made a modest rise (one tenth of a tick higher, rising to -1.2 in February from -1.3 in January) while the expectations reading pushed strongly higher rising in February to -5.5 from -16.9.

There are two concepts at work here. One is the assessment currently of the change month-to-month. The other is the historic standing of activity levels in the various sectors. Overall, the standings show climate at a solid 78.5 percentile mark while the current standing is at its 51.2 percentile and expectations are only at their 51.7 percentile. The climate reading is quite solid by itself while the current and expectations readings are only at a thin margin above their respective median values on data back to 2005. The current standings for retailing and services are below their median with readings of 42.0 for retailing and 25.4 for services- their respective historic median occur at rankings of 50.0. Thus, both of these show below-par readings. Wholesaling and construction show solid/strong readings with construction at an 87.8 percentile standing and wholesaling at a 91.2 percentile standing. Manufacturing, once the strongman of this series, has a still solid reading at its 76.1 percentile.

If you wonder where German businesses think they are going, apparently, they wonder too. Their overview ranking is only at the 51.7 percentile mark, just tad above its median (on data back to 2005). The outlook is weighed down by three standings below their medians: a 20.5 percentile standing for construction, a 34.1 percentile standing for services and a 35.6 percentile standing for wholesaling. Boosting expectations above the 50 mark that represents its median is the 58.5 percentile standing for retailing and the 68.3 percentile standing for manufacturing. The 'bad news' here is that no expectation reading is higher than its 68th percentile which suggests that there is no real pent-up optimism. There is some optimism but no significant optimism. And this, even though there are signs of the virus slowing, being less lethal, and putting fewer in the hospital.

Over one, two and three months, climate readings have improved on back across all sectors as well as for current conditions and business expectations in the aggregate. But over four, six, seven and eight months, there are sector declines as well as mixed declines for the current and expectations indexes.

U.K. retail sales rose 2% in January after falling by 3.4% in December. Still, sequential growth rates for nominal sales decelerated from a 16.5% pace over 12 months to a 4.4% pace over six months to 2.2% over three months. Spending on beverages & tobacco as well as on clothing & footwear shows decelerating growth rates.

Retail volumes also show sequential deceleration. Volume sales rise 1.9% in January after falling by 3.9% in December. The sequential pace of sales falls from a strong 9.1% annual rate over 12 months to -2.7% over six months and to -5.3% over three months.

In the quarter-to-date, nominal sales rise by 2%, but sales volumes are falling at a 3.2% annual rate.

We can also rank the year-on-year growth rates for sales; the rate ranks at a very high 98.8 percentile. For sales volumes, it ranks at the same high 98.8 percentile. That is good news, but it is undermined by the trends.

The progression for sales shows a slowdown except for registrations for passenger cars. Car purchases have surged at a 48% rate over three months. Passenger car sales are strong in the quarter and rank high in terms of their year-to-date rate of growth. But it is only a partial offset to slowing retail sales overall.

Surveys for retail sales are slightly less robust in terms of their long-term percentile standing. The CBI survey for retail sales for this time of year (a sort of seasonally adjusted view) has only a 19-percentile standing, in the lower one-fifth of its historic queue of data. Consumer confidence has a 26-percentile standing, at the border of the lower quarter of its historic queue of data. The volume of orders year-on-year does better with a queue standing at an 80.6 percentile.

The surveys show quarter-to-date declines in all the survey metrics in the table including consumer confidence. The data on sequential changes are not getting worse at a progressively worsening pace, but the changes in the survey metrics do erode over six months as well as over three months- just not faster. The six-month erosion is a reversal of gains made over 12 months and over three months. That erosion continues at nearly the same pace. Only for consumer confidence is the pace of erosion lessened over three months.

In January and December, however, there is ongoing erosion for the retail surveys and for consumer confidence.