Economy in Brief

After logging a long string of current account surpluses, the countries of the European Monetary Union (EMU) have now posted three deficits in a row for consecutive months. The turnaround is on the back of sharply increased imports which reflect increased imports of nonmanufactured goods. Commodity prices have increased sharply, and this has driven up the deficit for nonmanufacturers across the EMU.

The balance of trade on manufactured goods posted a surplus of €29.1 billion in the 12-month period ended 12-months ago. In the current 12-month period the surplus is €28.3 billion, a slightly smaller amount, but not much changed. Yet, for nonmanufactured goods, the 12-month average for 12 months ago was a deficit of €8.8 billion; that figure has ballooned to €21 billion on average over the last 12 months and has escalated to €30.4 billion in deficit on average over three months and progressed further to a deficit of €33.2 billion in January alone. All those figures are expressed at annual rates.

The point is that manufacturing in Europe seems to have held up well; however, it has not been able to keep pace with the sharp increase in nominal nonmanufacturing goods and a deficit has been created as a result. This is a deficit caused by the increased importation of nonmanufactured goods and substantially a deficit caused by the increase in the prices of nonmanufactured goods.

Looking at percentage changes, manufactured goods imports are up by 26.4% over 12 months but nonmanufactured goods imports are up by 82.6% over 12 months. For exports, manufactured exports are up by 12.8% over 12 months while nonmanufactured exports are up 30.5% over 12 months. Clearly the trade action has been concentrated in around nonmanufactured goods, not in manufactured goods. But manufactured goods have nonetheless held their ground.

Looking at the results for individual countries in Europe, Germany shows consistently faster import growth than export growth over 12 months, over six months and over three months. France shows an uneven picture with exports and imports trading places as far as which flow is expanding more rapidly. Over 12 months French exports grow faster than French imports and that trend holds up over three months as well, although it is reversed in each of the last two months. The U.K. has stronger imports than exports with imports up 23.5% over 12 months and exports up by just 11.4% on that timeline; exports are up at a 6.1% annual rate over three months with imports up at a 28.2% annual rate over three months.

Inflation in the European Monetary Union (EMU) rose by 0.7% in February after rising by 1.1% in January. The core measure for inflation (excluding food and energy) in February rose by just 0.1%; that was after rising by 0.7% in January. Sequential growth rates that measure inflation over 12 months, six months and three months show inflation has been building momentum for the headline inflation rate which expanded by 5.8% over 12 months, at a 7.9% annual rate over six months and at an 8.9% annual rate over three months.

The core rate of Inflation breaks this string of acceleration but only technically. The 12-month core gain is at 2.6%; that rises to a 3.9% annual rate over six months and that in turn backs off very slightly to log a technically smaller gain at a pace of 3.8% over three months. Essentially inflation has gone from being excessive over 12 months to being much more excessive over three months and six months according to each of these measures.

The ECB is well away from its target of hitting 2% inflation although as we're going to see in the averages for inflation how much better-behaved much of this inflation phenomenon is when averaged. Inflation has really welled up relatively recently although it's quite excessive and now it still has momentum.

Moreover, inflation is gaining momentum and from different sources. Oil prices are still extremely high in February. But Brent oil prices measured in euros fell 28.2% in February after rising by 14% in January. Oil prices remain high and the impact on inflation is still something to worry about because in global markets oil continues to hover at very high levels. Also, Europe has an economic 'IV' line for energy that is piped in from Russia making it dependent on the very country on which they have slapped aggressive economic sanctions. And to follow that thought… since Russia is walled off from global markets by sanctions, at some point it may find oil revenues as not as valuable as cutting off the oil flow and inflicting economic pain on Europe.

In several ways the war in Ukraine is a factor...

Before the war welled up, there were supply chain problems created by the pandemic (remember the pandemic?) and these supply chain issues were affecting prices globally, creating shortages, creating price pressures, and that now is made worse by having a war in Ukraine and having these countervailing sanctions placed on Russia.

Russia is rich in natural resources and with the West putting sanctions on Russia, Russian commodities are going to be unavailable to the world and this is going to be reflected in higher commodity prices. The invasion of Ukraine is taking Ukraine off the map as an international trading partner and that of course is going to hit the food market and wheat market particularly hard as well as the market for selected natural resources. The implication here is that inflation is high, inflation has momentum, and inflation has some new sources that are going to make it worse before things get better.