Economy in Brief: December 2023

The inflation picture in Germany is improving rapidly. In November the HIPC measure fell by 0.1%; in October it fell by 0.2%; and in September it was flat. This is an impressive string of month-to-month weakness in prices. During the same period, the core HICP fell by 0.2% in November compared to October, it rose by 0.2% in October, while in September the core declined by 0.2%. Again, that's an impressive string of weakness in prices – this time in the less-volatile core prices.

Sequential trends- Looking at sequential headline price trends from 12-months, to six-months, to three-months - at annual rates of change- inflation logged a 2.2% gain over 12 months, it edged up to a 2.7% pace over six months and then, over three months, prices fell at a 1.3% annual rate. Core inflation rose by 3.9% over 12 months, the six-month annual rate fell to 2.8%, and the core rate over three months annualizes to a minus 0.6% change. Inflation is controlled and largely falling. Will this trend remain in place?

A year-on-year focus- Central banks tend to emphasize the year-over-year rates of change in prices to be sure they are reacting to the trend and not to transient volatility. The year-on-year gain in the headline HICP for Germany is at 2.2%, the core is nearly double that at 3.9%. While there are no targets for country level inflation in the European Monetary Union, the German economy is a large economy and gets a very large weight in the statistics for the EMU. Germany's progression to lower rates of inflation is going to have an important and impressive impact on the EMU community.

The German domestic inflation gauge- The current domestic version of inflation has not been quite as favorable but the headline fell by 0.1% in November, was flat in October, and rose by 0.3% in September. The domestic German CPI excluding energy rose by 0.2% in November, rose by 0.1% in October, and rose by 0.2% in September. Its sequential annual rates for headline inflation, however, fall steadily from 3.2% over 12 months, to a 2.4% pace over six months, to a 0.7% pace over three months. That’s clearer deceleration than for the HICP headline measure. The German CPI excluding energy also shows a steady deceleration but logs inflation rates higher than those for the core HICP. The CPI excluding energy rises at a 4.1% annual rate over 12 months, at a 3% annual rate over six months and then decelerates to a 1.8% pace over three-months - still a nice progression of prices behaving- but not the same as the -0.6% three-month pace that the core HICP posts.

Diffusion signals are encouraging- Diffusion measures the breadth of the change in inflation across categories over the various periods. Over 12 months, the diffusion measure registers 45%, which tells us that inflation is accelerating in only 45% of the categories. Over six months, diffusion is 18%, which tells us that inflation accelerated over six months compared to 12 months in only 18% of the categories. Over three months, diffusion stood at 36%, telling us that inflation accelerated in only 36% of the categories over three months compared to six months.

Inflation signals showing progress reinforce one-another- Breadth statistics back up what's going on with headline and core inflation. Inflation is broadly falling and not accelerating; we see that both headline and core inflation rates are decelerating. These trends echo trends that we see in the United Kingdom and in the United States. Inflation progress is being aided by weakness in global oil prices. OPEC as well as OPEC-plus have not been able to cut back output fast enough to stabilize oil prices. Measured in euros, the Brent oil price is down by 15% over 12 months; it rises at an 18.3% annual rate over six months, but then it’s falling at a 9.4% annual rate over three months. Brent prices expressed in euros fell by 9.2% month-to-month in November after falling 2.9% month-to-month in October; those progressions followed a 10.7% increase in September. Oil’s contribution is erratic.

IP in Germany remains pressured- Industrial production in Germany is under pressure. Production declined in each of the last FIVE months, three of them presented in this table. Consumer goods production is down in two of the last three months. Capital goods production is down in two of last three months and intermediate goods production is down in two of the last three months as well. Do you see a pattern here?

Trends show continued weakness and some step up in the pace of deterioration- In addition, sequential growth rates show that the growth rates over three months and six months have weakened compared to 12 months. Overall 12-month growth is at -3.4% with industrial output growth over six months at -7.4% annualized and at -6.9% annualized over three months. The numbers stop short of signaling a clear ongoing deceleration but do not miss it by much. For consumer goods, sequential growth rates progress from bad to even worse. For capital goods, the trend is a little more erratic with a decline of 0.8% over 12 months, a bigger decline at a 6.6% annual rate over six months and then flat performance over the last three months. Intermediate goods show sequential deterioration with annualized growth rates running from -4.5% over 12 months, to -6% over six months, to -7% over three months.

Other industrial gauges weaken- These IP trends dove-tail with the weakness we have seen in some of the earlier releases on real manufacturing orders and real sales in manufacturing.

Surveys weaken- Manufacturing surveys have weakened as well with the ZEW current index showing sequential deterioration, along with the IFO manufacturing index, IFO manufacturing expectations, as well as the EU Commission industrial survey. Any way you seem to slice the statistics, they seem to be weak and getting weaker.

Other Europe is mixed- Early manufacturing results for a few other European countries (at the bottom of the table) show trends for Portugal, Spain, France, and Norway. These reveal production increases in October after widespread declines in September and mixed declines in August. Sequential growth rates for other Europe tell a mixed story as Spain and Norway show clear accelerations in train, France shows a clear deceleration in train, and Portugal shows a mixed trend anchored by declines in output over 12 months and three months.