Economy in Brief: February 2023

GDP in the European Monetary Union (EMU) settles in at a growth rate of 0.4% at an annual rate in the fourth quarter of 2022. This is a slowdown from the third quarter growth rate of 1.2% which itself was a slowed-down pace. GDP ends 2022 on a positive note with growth, but with a slowing trend. The fourth quarter growth rate for the monetary union slowed to 1.9% after reaching 2.3% in the third quarter, compared to 4.3% in the second quarter. The ranking of the year-over-year growth rate for the EMU (at 1.9%) is in its 56.5 percentile, leaving it slightly above its median result on data back to the fourth quarter of 1997.

Q4 GDP Seven members of the monetary union have provided estimates of GDP for the fourth quarter. They are Finland, France, Germany, Italy, the Netherlands, Portugal, and Spain. Among these reporters, Finland logs a decline in GDP in Q4 of 0.8% at an annual rate. Germany reports a decline of 1% at an annual rate; Italy reports a decline at 0.5% at an annual rate. Posting GDP increases in the fourth quarter are France, at a 0.5% annual rate, the Netherlands, at 2.5% at an annual rate, and Spain, at a 0.9% annual rate.

Q3 GDP In the third quarter, GDP declined in Finland and the Netherlands quarter-to-quarter while in the second quarter there had been no EMU country in the table reporting GDP declines quarter-to-quarter (U.S. GDP did decline).

Year-on-year GDP Looking at year-over-year results for Q4, all reporting countries have increases in GDP with France’s 0.5% the weakest gain followed by Finland's 0.6% gain. The strongest gain over four quarters is 3.3% for the Netherlands followed by Portugal's 3.1%. Note that outside the four largest economies, EMU GDP gains in Q4 for other members were 3.6%.

GDP trends Excepting the Netherlands, all countries report slower year-over-year growth in the fourth quarter than the third quarter and all countries reported slower growth in the third quarter compared to the second quarter. In the second quarter, all countries reported slower growth compared to the first quarter except for Spain. In broad terms, the European Monetary Union is showing a clear case of slowing growth. This is not surprising coming out of the recession and the initial boom in the wake of having dealt with COVID and the recovery from the impact of the pandemic.

The U.K. Elsewhere in Europe, the U.K. shows flat growth for the fourth quarter (Q/Q), an improvement from the decline that it had quarter-to-quarter in Q3 when GDP fell by 0.8%. The U.K. joins the rest of Europe showing decelerating year-on-year growth rates from the first quarter to the second to the third to the fourth. U.K. GDP growth in the fourth quarter of 2022 annualized is down to only 0.4% year-over-year.

Recovery favors the small... Recovery in the EMU has been stronger outside of the four largest economies. In the fourth quarter, the four largest economies grew 1.3% year-over-year compared to 1.9% for the EMU overall. In the third quarter, the four economies grew at a 2% pace while the EMU grew by 2.3%. In the second quarter, the four largest economies grew at a 3.9% pace compared to 4.3% overall for the whole of the monetary union and 5.7% for the EMU apart from the Big Four. In fact, while the four largest economies are slowing to 1.3% in the fourth quarter from 2.0% in the third quarter, the rest of EMU accelerates to 3.6% from 3.3%.

Rankings Rankings are for the period extending back to the fourth quarter of 1997. EMU shows a slightly better than median performance for its year-over-year growth rate in the fourth quarter at the 56.5 percentile, just slightly above its median marker at 50. Above-median growth appears for Italy, the Netherlands, and Portugal. Spain ranks just below its median at a growth standing of 48.9% while Finland, France, and Germany have very weak standings (of 29.3%, 16.3% and 40.2%, respectively).

Other rankings The U.K. has a growth standing in its 12th percentile. The U.S. is at its 14th percentile. Japan is at its 39.8 percentile. The EMU median ranking is at its 48.9 percentile and the four largest economies with growth pooled and GDP-weighted rank in their 41.3 percentile. It has been a tough row to hoe for the larger economies. Current performance is on a downswing with central banks hiking rates and some inflation metrics looking stubborn again after breaking lower for a short while. Policy and central banks face challenges ahead.

Swiss inflation rose by 0.9% in January after being dead flat in December. The rise in the HICP for Switzerland is the largest month-to-month rise in this cycle and the largest increase for quite some time, spurred by food, housing and energy prices. The same is true of the Swiss domestic CPI measure which rose by 0.7% in January after a 0.1% increase in December. Both the HICP and the Swiss CPI measures are rising at a 4% annualized rate over three months. Below I will focus on the CPI rate because its details are presented in the rest of the table.

The Swiss CPI is up by 3.3% over 12 months; it's up at a 2.5% annual rate over six months, showing some deceleration, and then, it accelerates sharply to 4% over three months. The core inflation rate, which rose by 0.4% in January after rising by 0.2% in both November and December, is up by 2.2% over 12 months; it's up at a 2% annual rate over six months and then it accelerates to a 3% annual rate over three months.

Switzerland presents a category of prices that is unusual among CPI reporters; it's a category of price changes excluding administered prices. That category shows prices rise by 0.5% in December after rising by 0.2% in December and 0.3% in November. The progression of prices in this category shows a 2.9% rise over 12 months, a slight deceleration to a 2.7% pace over six months and then acceleration to 4% over three months. Excluding administered prices doesn't have much impact on the rate acceleration, but it does reduce the level of year-over-year inflation compared to the headline but not compared to the core.

Among the eight categories in the table for Swiss consumer prices, there is consistent acceleration reported only for housing and energy where the prices are not seasonally adjusted. But in that category, prices rise by 5.1% over 12 months, at a 5.4% annual rate over six months and at a 7.3% annual rate over three months. Prices show deceleration on a consistent basis for health care with the inflation rate of minus 0.4%, deteriorating to minus 0.5% over both six months and three months when annualized.

Swiss inflation has accelerated recently and has a rate above 3% over 12 months and above 4% over three months, but when we measure the inflation performance on a compounded basis since January 2020 before COVID struck, the HICP inflation rate has only been rising at a 1.4% pace and the CPI has risen only at a 1.5% pace. In fact, most categories are quite well behaved with housing and energy showing a 2.7% inflation rate over that span. Transportation, another not-seasonally-adjusted category, shows inflation running at a 3.1% pace over the period. Apart from those, all the categories are showing inflation rates below 2% with health showing prices falling on balance, logging a -0.4% annual rate from January 2020.

At the bottom of the table, we reference the inflation rate for the European Monetary Union on its HICP measure. This measure is lagged because the data for January are not yet available. What we see is the substantial difference between inflation in Switzerland and in the European Monetary Union despite the union’s 2% goal. We see that over 12 months the EMU inflation rate has been at 9.2% instead of the 3.2% the Swiss posted. Over six months, EMU inflation is lower at a 7.1% pace, compared to a much lower 2.8% pace in Switzerland. Over the recent three months, the EMU pace is at 4.6% pace compared to 4.4% in Switzerland, a much closer comparison. These numbers are slightly out-of-sync because we are looking at the up-to-date European Monetary Union data which are lagged by a month against the Swiss data which are up to date through January. But they shouldn't be that dramatically different. What we do see is that EMU inflation over 12 months and six months has been quite substantially stronger than inflation has been in Switzerland. Even though Switzerland has been in a relatively high inflation environment, it has managed to keep its domestic inflation rate much more in check. And while it faces a minor inflation problem currently, there's no sense that it's particularly become entrenched. There is high inflation in two categories: (1) housing & energy inflation runs at a 7.3% annual rate over three months and (2) food & beverage inflation runs at a 6.1% inflation rate and that has been consistently elevated. It is increasing at a 5.6% pace over 12 months and a 6.7% annual rate over six months; the 3-month inflation rate of 6.1% is a step down. However, in the month of January food & beverage inflation exploded again, rising by 1.5% on the month. Still, overall Swiss inflation is remarkably well-behaved especially in a more global context.