Economy in Brief: April 2022

German inflation surged in March, jumping by 2.1% month-to-month in March alone. In ECB parlance, the HICP target is for a gain of 2% over 12 months, not in one month. The German contribution to EMU-wide inflation is way over the line. German core HICP inflation is more modest in March but still excessive. It is up by 0.5% month-to-month for an annualized rate of 6.1%.

Headline inflation trends Over 12 months, the German HICP is up by 7.6%. Over six months, the annualized pace is 11.4%. Over three months, the pace is up to a whopping 17.6% - I won't try to annualize the month-to-month gain for you, but that is going to be in the stratosphere.

Core inflation trends The core rate is up by 3.7% over 12 months and its annualized pace over six months rises to 4.2%. But over three months, the HICP core pace is back down to 3.7%. That is good news and evidence of inflation resilience in the face of a raging headline. However, the German domestic CPI is not so upbeat as its 3-month core pace accelerates from three-months to six-months to 12-months, with no drop-back.

Inflation diffusion – a hopeful sign? Inflation diffusion, the breadth of inflation acceleration across the main CPI categories, is at 81.8% for year-over-year inflation-that metric compares the 12 month-rise in price changes across categories to their respective 12-month increases of 12-months ago. Over six months diffusion drops to 54.5%, a comparison of inflation acceleration over six-months relative to 12 months. That acceleration is modest despite the actual very strong gain of inflation over six months. Over three months as well the diffusion reading is 54.5%; that metric compares inflation acceleration over three months compared to over six months. Diffusion at 100% indicates inflation accelerating in all categories; diffusion at zero percent indicates inflation accelerating in no categories. 50 percent is the 'point of neutrality' where inflation acceleration and deceleration are balanced. At 54.5% diffusion three- and six-month inflation acceleration this month is showing some net increased inflation pressure, but not much. Certainly, diffusion suggests that the breadth of inflation is not as intractable as inflation strength suggests. Whether this is good news or evidence that inflation must spread further before it can settle down, only time will tell.

Where inflation is most intense Over three months inflation accelerates in six categories: a 46.8% annual rate in transportation, a 26.8% annualized gain for rent & utilities, a 9.7% pace for food, a 8.8% for restaurants & hotels, a 6.6% pace for alcohol, and a -1.3% pace for communications (since over six months prices in that category had fallen even faster, the 1.3% drop is technically a period-to-period acceleration). Over six months the same categories accelerated except that communication drops out replaced by recreation & culture. Over 12 months acceleration is broad based; it accelerates everywhere except for two categories: education and 'other.'

Brent oil prices During this sequence of dates, Brent oil prices measured in euros have accelerated from a rising pace of 85.3% over 12 months to 156.8% over six months to 461.1% over three months. A great deal of the inflation acceleration impulse is coming from oil and commodities and through food. Transportation and 'rent & utilities' are the leading two inflation categories in each time segment with food in the third position each time. Still, food and energy are important and just because inflation is intense there does not mean it will stay there and not migrate to other categories. When food and energy cause cost pressures, that often generates broader price pressures as well. So, while the breadth of inflation in Germany is restrained since so much of the inflation has been recent, it is not yet clear how much of it has yet to be transmitted into final product prices before prices can stabilize and inflation can settle down.

The OECD leading economic indicator for the entire OECD region fell by 0.1% in March, matching its 0.1% decline in February. Over three months the index is falling at a 0.7% annual rate, the same pace as its decline over six months. Over 12 months it's rising by 2.7%. The standing of the index level is at the queue percentile standing at the 50% mark putting at exactly at its median - a neutral standing overall for growth prospects.

The index for the OECD-7 was flat in March after being flat in February. The index shows two declines, one over three months and another over six months with a 3% increase over 12 months. The index level standing is slightly better than for the whole of the OECD region at its 52.7 percentile.

The euro area shows a -0.1% reading for March, the same as February. Hit declines at a 1.4% annual rate over three months compared to minus 1.2% over six months and the 2.9% gain over 12 months, the index is at a 57.2 percentile standing for the euro area, a more moderate position.

For Japan, the OECD index is flat in both March and in February. It's flat over three months; it declines at a 0.1% pace over six months and is up by just 1.5% pace over 12 months. Its index logs a 65.8 percentile standing, marking it as stronger than the other OCED standing in the table. Japan's economy has been and remains sluggish.

The U.S. metric shows no change in March and no change in February with a 0.1% rise over three months. It logs a -0.2% change over six months and over 12 months at a 2.9% increase. The U.S. LEI has a 51-percentile standing based on its index level, leaving its leading economic index just slightly above its historic median and pointing to a 'normal' outlook for growth.

Evaluating six-month growth rates in the LEI Taking a second look at these LEIs looking at them in terms of their six-month growth rates, which is the way the OECD likes to look at the indicators for their leading index properties, we find that in March all of these countries and these groupings show declines; when we add China to the mix it also shows a decline. In February, there is weakness across the board apart from Japan that's flat and the euro area that logs in at a 0.1% increase. Looking at the growth rates over six months for six-months ago, we see negative values for the U.S. and for China with small to modest positive percent changes for Japan, the euro area, and the OECD group as a whole as well as for the OECD-7. Looking at the assessments for 12-month growth that existed one-year ago, we see positive values across the board for all the countries and all the groupings including China.

However, we can also rank these growth rates. And ranking the growth rates on their recent six-month growth leaves every single one of them below their historic median that means a ranking below 50%. The strongest rankings from March are from Japan and the U.S. with each of them sporting a 44.2 percentile standing. The weakness ranking comes from the euro area at a 21.2 percentile standing, followed by a 27.4 percentile standing for the OECD area as a whole and a 29.8% standing for China alone.

The OECD leading indicators show great deal of sluggishness globally. The economies for the most part rank somewhere in the range of sluggish, weak, or declining. That is in terms of their outlook. We continue to see actual economic growth positive across the OECD area and even in China where the zero COVID policies have held back growth by quite a lot. However, the leading indicators warn about the future and these indications come amid a period where inflation has been flaring and with central banks beginning to become more restrictive. It continues to be an uneven patch for the global economy.

Japan's economy watchers index in March bounced back, rising to 47.8 from 37.7 in February. At that level, the economy watchers index has a 59.8 percentile standing above its historic median that occurs at standings mark of 50%.

The index showed improvement across all its components in the current reading. This marked a reversal month-to-month showing increases in every component compared to February when there were declines in every component except two; in February services and employment had improved.

Among the current components, the highest standing is for employment at an 88.3 percentile standing; that's followed by eating and drinking places that have a 66.9 percentile standing and retailing with a 64-percentile standing. The weakest current standing is for housing at a 38.1 percentile standing followed by the total for corporations at a 39.7 percentile standing.

The economy watchers future index also improved; that index rose to 50.1 in March from 44.4 in February. Its standing is at its 65.7 percentile mark, a moderately firm standing. The future readings all improved in March and this contrasts to February, when 4 component readings were weaker month-to-month while 6 improved by the month.

The future index shows the highest standings for services followed by eating and drinking places followed by the response by households. The weakest reading is for housing followed by manufacturers.

Still, the trends for the economy are not particularly strong. The three-month change still shows a decline in the current index and a net decline for all components. Over six months all the categories plus the headline increase excluding housing - that is weaker. Over 12 months everything in the current index has a weaker change than over the previous 12 months- but three components manage net gains on the comparison.

The future index shows only three components are stronger over three months, but only two components fall by more over three months than they fall over six months - those are housing and manufacturing. Over six months all the components are net lower and falling by more over six months than over 12 months. Over 12 months all components are showing bigger decline or smaller increases than they had over the previous 12 months – five categories manage outright gains but these are smaller than the gains logged 12 months ago-hence weaker momentum.

German industrial production advanced by 0.2% in February. Its rise followed a 1.4% gain in January and a 0.9% gain in December. Industrial output in Germany is accelerating from a 3% pace over 12 months to a 9.3% annual rate over six months to a 10.7% annual rate over three months. Despite infections with the virus and despite the increasingly dangerous situation in Ukraine during that period, Germany has continued to rebound. As the war in Ukraine started in late-February, the German economy seems to have put itself on firm footing.

German IP is accelerating and looks very solid The output gained in the headline is supported by all the main sectors on trend. In February, two of three sectors made month-to-month gains: consumer goods and intermediate goods saw output rise with capital goods output falling back by 2%. However, from 12-months to six-months to three-months consumer goods output is accelerating from an annual rate of 10.7% to 14.9% to 25.8%. Capital goods output falls over 12 months declining by 2.1%. But then it accelerates to a 9.8% pace over six months but does step back to a growth rate of just 4.2% over three months. Intermediate goods advance at a 1.3% pace over 12 months, accelerate to 5.2% over six months and accelerate further to 9.0% over three months. Two of three industrial sectors support the acceleration in the headline. German acceleration backsliding in capital goods interrupts the trend of sector acceleration in output over three months. And that backsliding is to a growth rate that sill registers 4.2% growth at an annual rate over three months-still quite solid.

German manufacturing gauges mostly show growth Manufacturing output was flat in February after gains of 0.6% in January and 1.6% in December. So, during this monthly period, the growth in manufacturing was slowing; however, more broadly, manufacturing output accelerates from 1.4% over 12 months to a pace of 8.6% over six months to a pace of 9.2% over three months. Similarly, real manufacturing orders in Germany grow by 2.9% over 12 months, accelerate to 4.8% over six months and accelerate further to 10.2% over three months. However, real sector sales are a little more uneven; they're growing on all the horizons, but the 4.3% growth over 12 months is still slightly higher than the 4% growth rate over three months.

German indicators are mixed German industrial indicators show mixed performance during the period. The ZEW index is an exception, logging negative readings in each of the last three months. Despite those negative readings, the ZEW index improved slightly to -8.1 in February from -10.2 in January. The IFO gauge for manufacturing improved in February and the expectations gauge for manufacturing also improved in February although the EU Commission industrial index slipped slightly from 24.2 in January to 23.7 in February. Looking at the averages of 12-months to six-months to three-months, the ZEW average is weaker over three months than it is over 12 months. The IFO manufacturing index is slightly weaker over three months as its average falls to 103 when averaged over three months compared to a 12-month average of 104.2. The IFO manufacturing expectations are also weaker at 101.8 over three months compared to a 12-month average of 103.7. The EU Commission index is slightly stronger at 24.4 average over three months compared to 21.8 over 12 months.

Other Europe is mixed Turning to early-February reports from other European countries, there are five others that are reporting. Norway and France show output declines in February; Ireland, Portugal, and Sweden show increases in February. However, the countries that show increases in February show declines in January and vice versa. So, what we're looking at in Europe is monthly volatility. Looking at annualized growth rates over 12 months, six months and three months, there is not a lot of strength. Portugal, Sweden, and Norway log three-month growth rates that are all negative Norway, in fact, shows negative growth rates over three months, six months and 12 months. In contrast, France shows positive growth rates throughout; it is improving over three months compared to 12 months, rising from 3.4% over 12 months to a 7.3% pace over three months. Ireland shows acceleration, moving from -15.4% over 12 months to -12.1% over six months to log a spectacular annualized gain of 32.9% over three months.

Quarter-to-date German IP orders and real sales: In the quarter-to-date, most German IP responses are strong. Germany shows industrial output increasing in a 9.1% pace QTD, led by consumer goods that are rising strongly at a 37.6% annual rate but held back somewhat by capital goods where output is declining at a 5.5% annual rate. Manufacturing output is increasing at a 5.8% annual rate in the quarter-to-date with real manufacturing orders up at a 0.5% pace, but real sector sales are falling at a 0.4% annual rate.

German indicators: German indicators show mixed performance QTD; the ZEW index is down by 6.4 points in the quarter-to-date and the EU Commission index is down by 0.4 points in the quarter-to-date. The two IFO gauges for manufacturing and manufacturing expectations each show a gain of 2.4 points on the quarter.

Other Europe QTD-the good, the bad, and the homely: Turning to other Europe, Ireland shows an outstanding rise of 69.2% in an annual rate followed by France at an 8.4% pace of gain QTD; Norway’s rise is at a 5.8% pace, Portugal shows output receding at a 15.2% annual rate, Sweden shows output declining at a 4% annual rate.

European industrial data are firm ahead of the Ukraine-Russia outbreak These data set us up to assess the pre-Ukraine-Russia war standing of industry in Germany and select countries in Europe. Conditions rate firm-to-strong amid some variability- as always. The March reports will be more telling.