Economy in Brief: June 2023

The BOE’s Agents survey demonstrates that demand for consumer goods, consumer services and total services including exports have very strong - top 10 percentile standings. Total business services have a top 30-percentile standing. While inflation is flaring sharply, demand remains strong underlining that BOE policy may still have some ways to go to corral and reduce inflation.

Demand in the U.K. is strong, but output has a weaker standing in its 40th percentile, below its historic median. Exports of manufacturing goods are near their historic median (a 50% standing) while the construction sector in the U.K. is weak, at a bottom 10-percentile standing. Still, investment activity is rated at a still-solid 68-percentile standing.

Costs of imports, materials, and labor costs show historic standings in their top 20% to 15% to 3% with labor showing the strongest relative standing. Labor costs are a particularly pressing problem in historic profile. Prices have an even higher, top one-percentile standing: this applies to domestic prices, consumer goods, consumer services, and business-to-business services. In this environment, business profit margins are at a sub-30-percentiel standing.

The labor markets report recruiting difficulties at a 79-percentile standing and employment intentions are weaker, just below their historic median. Businesses report capital usage at only a 70th percentile standing.

In this environment with interest rates rising and inflation flaring, small, medium, and large businesses all report credit availability as challenging with low standings below the 15-percentile mark for businesses of all sizes and with large businesses reporting the most severe problem, but by only a small margin.

Car registrations in Europe rose briskly in May, advancing by 10.5% from April as registrations (hereafter, sales) had fallen 12.9% month-to-month. Sales changes, calculated from three-month moving averages, increase month-to-month by 1.3% after a 1.7% April drop. Rather than viewing May as a strong man, it appears to be a rebound month.

Sequential growth rates show 12-month growth in European sales at 20.5%, a very strong pace. Over 6 months, registrations/sales were down by 1.2% at an annual rate. Over 3 months, they expanded at a 16.1% annual rate. Growth rates, calculated from three-month moving averages, show an increase over 12 months of 23.7%, a 6-month increase at a 2.4% pace and a 3-month increase at a 3.3% annual rate. Smoothing the sales shows steadier and continued growth in car registrations/sales in Europe. While the year-over-year gain is quite strong at 23.7%, the ensuing 3-month and 6-month growth rates are much more moderate in the 2½% to 3 ½% range, annualized.

Growth rates by country largely echo the headline as Germany, Italy, Spain, and the U.K. all show positive growth rates in May that are recovering from declines in April. France shows a 0.6% gain in May following a 1.2% rise in April, scoring 2 gains in a row but on much more moderate changes than those reported in other countries.

Sequential gains by country reveal extremely strong gains in Germany, Italy, and France, where the German three-month growth rate annualizes to 66.9%, France to 32.1%, and Italy to 23.4%. These contrast with Spain where there's a 20.3% decline in registrations and the U.K. that has a 48.5% decline in registrations at an annual rate over 3 months.

Sequential patterns show indeterminate or complex results for Germany, France, and Italy. All three cases demonstrate growth rates over 12 months near or over 20% and slip over 6 months only to rebound over 3 months to growth rates nearly as strong or at a stronger pace than they posted over 12 months. France is again the more unusual case as its growth rates are steady and accelerating with a 6-month fall back in growth that's minor in nature as growth is 18.5% over 6 months compared to 22.6% over 12 months and then advancing at a 32.1% annual rate over 3 months. Spain and the U.K., however, show clear decelerations in growth from 12-months to 6-months to 3-months with both posting double-digit declines over 3 months annualized.

The latest estimates for UK CPI inflation were firmer than expected in May. The headline inflation rate held steady while core inflation continued to rise. This will pile pressure on the Bank of England to raise its benchmark interest rate more aggressively in the weeks ahead.

The key elements of note from this data release were as follows-

• The consumer price inflation rate rose to 8.7% In May, maintaining its level from the previous month and exceeding the consensus forecast for a drop to 8.4%.

• On a monthly basis, the headline CPI index rose by 0.7% m/m in May after a climb of 1.2% in April.

• Much of the upward pressure on inflation came from a rise in prices for air travel, second-hand cars as well as recreational and cultural goods.

• Core inflation (which excludes energy, food, alcohol and tobacco) surged by 7.1% in the 12 months to May, up from 6.8% in April and the highest rate since March 1992.

• However, while core inflation rose, there was a slight easing in food price inflation which slowed to 18.4% yr/yr in May, after 19.1% in April.

• The inflation rate for goods fell to 9.7% in May, after 10.0% in April, largely as a result of a further fall in energy prices.

• Meanwhile, services inflation climbed by 7.4% in the year to May, up from 6.9% in April. This may be of particular concern to the Bank of England given the sensitivity of service sector inflation to wage pressures.

• Brighter news emerged today, however, from May’s release of producer price inflation. Specifically, headline output prices fell 0.5% m/m in May (after a downward revision to the previous month’s figures to -0.2% m-o-m), while core output prices were down 0.3% m/m and input prices fell 1.5% m/m.