Economy in Brief: July 2023

HICP Trends- Italian inflation fell by 0.2% in June; its core elevated by 0.4% month-to-month. Sequentially, headline inflation paces at 6.7% over 12 months, that falls to a very skinny 0.3% over 6 months, and then expands sharply to register an annualized gain of 5.5% over 3 months. The headline figure has been quite volatile. However, core inflation is up by 6.1% over 12 months, up at a 5.3% annual rate over 6 months and at a 4.3% annual rate over 3 months. The core rate shows sequential deceleration in the face of headline inflation turbulence.

Domestic inflation trends- Italy's domestic CPI follows the same pattern as the EMU-wide harmonized gauge (HICP) for its headline and core. The headline for domestic inflation rises 6.4% over 12 months, falls sharply on a 0.8% annual rate increase over 6 months, and then rises back to a 4.1% annual rate of change over 3 months. The domestic Italian CPI excluding food & energy shows sequential deceleration like its HICP counterpart. It rises at a 5.6% pace over 12 months, slides to a 4.8% pace over 6 months, and logs a 4.0% annual rate over 3 months. The HICP measure and the Italian domestic measure of inflation are giving the same signals about inflation. Headline inflation has been high and volatile and has had some bounce back over the last three months, while core inflation, undeterred, continues to edge down. But core inflation is still running at a rate of 4% or more over the last 3 months. Its pace over 12 months, on the other hand, a pace that that the ECB pays more attention to, is still in the area of 5 ½ percent to 6 ½ percent.

Acceleration/deceleration trends are mixed- The table provides evidence on inflation’s acceleration and deceleration over 3 months, 6 months, and 12 months. Over 3 months compared to 6 months, gauging acceleration across categories, inflation is accelerating in half the categories (diffusion = 50%). Over 6 months compared to 12 months, inflation accelerates in only about 42% of the categories. Over 12 months compared to 12-months ago, inflation accelerates in 83% of the categories. Looking at the data in the table, the year-on-year acceleration figure seems high considering that the HICP headline and the domestic CPI headline both show increases on the order of 6 ½ percent or so over 12 months compared to gains of over 8% a year ago. If inflation is so much lower now, why is diffusion higher in comparison? Looking at the core inflation rates, we find the answer: the year-ago HICP core inflation was 4.1%; over the last 12 months the core inflation rate is 6.1%; a year ago the domestic core rate was at 3.8% and over the last 12 months is 5.6%. So, while the headline gauges have decelerated, it’s the core rates that are accelerating and reflected in the diffusion index.

Quarter-to-date inflation- The quarter-to-date data reflect the finished second quarter. Inflation in Q2 logs in at a 2.8% annual rate increase for the headline and a 3.8% annual rate increase for the core in the HICP. Domestic inflation on the Italian gauge has a headline gain of 2.4% with the core much hotter at a 4.7% annual rate increase.

The deficit on trade in the European Monetary Union in May fell to €0.86 billion from €7.95 billion in April. The deficit decline was the product of trends that we can express in several different ways. • One way to look at it is to chronicle the trade balances by main product types. For example, the balance on manufacturing trade moved into a stronger surplus at €28.2 billion up from €23.3 billion in April. Also contributing to improvement is a smaller deficit in the balance on nonmanufacturing trade that fell to -€29.1 billion in May from -€31.3 billion in April. • Another way to look at the deficit contraction is to note that exports rose by 2.9% in May as imports fell by 0.1%. On a month-to-month basis, exports gained much more traction than imports, which backed off, helping to move the trade balance into a smaller deficit position.

Manufacturing trade Manufacturing trade in May produced an export gain of 2.9% against the rise in imports of 0.4%. Exports dominated the scene, driving the export surplus and manufacturing trade that we referred to above. This compares to April when exports of manufacturers fell by 4.8% and imports of manufacturers rose by 3.6% creating the exact opposite result.

Viewed sequentially, exports are weakening in manufacturing. Still, they rise by 1.7% over 12 months, fall at a 7.6% annual rate over 6 months and then reducing that pace of decline but still falling by 4% at an annual rate over three months. Manufacturing imports on a sequential basis fall by 2.8% over 12 months, fall at a 6.2% annual rate over six months but then rise at a 2% annual rate over three months. Except for the year-over-year changes, import trends and manufacturing are stronger than export trends.

Nonmanufacturing trade Nonmanufacturing exports in May rose by 2.9%, stronger than their 1.3% gain in April. In comparison, imports of nonmanufacturing goods fell by 1.4% in May helping to drive the overall trade picture toward surplus while in April nonmanufacturing exports rose by 1.3% as imports surged, rising by 7.6% month-to-month, sharply widening the deficit.

Sequentially nonmanufacturing exports are strengthening as weakness dissipates. Nonmanufacturing exports fall 10.4% over 12 months, fall at a 9% annual rate over six months and then fall at a 1.4% annual rate over three months. All those flows showed declines in value, but the pace of decline is easing. For imports, there is a more erratic pattern and one that leads to slightly less weakness over three months than 12 months. Still, the data show nonmanufacturing imports are falling at a rapid rate and that helps to contract the deficit on all the horizons. Over 12 months nonmanufacturing imports fall by 26.9%. Over 6 months they fall at an annualized rate of 38.9%; that result was cut nearly in half to a decline of 21.1% at an annual rate over 3 months. Yet, the pace of decline is still very steep- about 15-times-the weakness in nonmanufacturing exports on the same period. A lot of the improvement in trade is on the import side and coming through persistent weakness in nonmanufacturing imports.

Much of the progress in trade that we have seen globally has come on the back of lower commodity prices, explaining the weakness in nonmanufacturing flows. Oil and energy product prices have been weakening. Energy flows were greatly interrupted at the start of the Russia Ukraine war and since then a lot has been done to try to achieve some increases in energy supply and altogether these efforts along with slowing economic growth and what was a warmer than expected winter have helped to contain energy prices. Those prices continued to be soft although OPEC has been making noises that it is ready to take steps to try to firm up prices in the oil market.

Export-import trends in Germany, France, and the U.K. The table contains data for Germany, France, and the U.K. for exports and imports to take a country-specific look at what is going on with trends. In Germany, exports are increasing on all horizons but they steadily slowing from 12-months to 6-months to 3-months. Imports, on the other hand, rise by nearly 4% over 12 months then fall at a 20% annual rate over 6 months and fall at about a 13% annual rate over 3 months- not exactly sequential slowing, but a continued pattern of contraction, nonetheless. France’s sequential trade patterns are less clear for exports where exports rise by 9.5% over 12 months, decline at a 6.5% rate over 6 months and then rebound to grow by less than 1% at an annual rate over 3 months. But same horizons imports are getting progressively much weaker in France as imports fall by 2.4% over 12 months, decelerate sharply to fall at a nearly 30% rate over 6 months and then decline at an expedited 37% annual rate over 3 months. Again, with France the driving force for trade improvement comes from import weakness. The U.K., of course, is not a European Monetary Union or EU member; its exports show clear sequential deterioration along with export growth of 24% over 12 months, an export decline at a 14.6% annual rate over 6 months and then a horrific decline at a 55% annual rate over 3 months. For the U.K. except for the year-over-year result exports are much weaker than imports persistently; U.K. imports fall by 1.2% over 12 months; they fall at a 10% annual rate over 6-months and then at a 7% annual rate over 3 months.

Other export trends At the bottom of the table, we look at export trends in four additional EMU members: Finland, Portugal, Belgium, and Italy. Three of these four show export declines in May. Three of these four show export declines in April; three of the four show export declines over three months. All of them show export declines over six months and all of them show export declines over 12 months. In addition, three of four countries report double-digit export decline over 12-months; only Portugal escapes that fate and does so only technically with 9.9% decline over 12 months. All have double-digit declines in exports over 6 months and all have double-digit declines of 20% or more except Portugal (-15.7%). Three of four have double-digit export declines of 15% or more annualized over 3 months; the exception is Finland that posts the opposite- a surge in exports at a nearly 40% annual rate.