Economy in Brief: February 2023

Industrial activity in the European Monetary Union advanced for the second month in the row, according to previously released manufacturing PMI data. The manufacturing industrial production reading for the entire euro area is not yet available; however, for 13-European Monetary Union member countries, the median increase in December was 0.2%; this follows a 1.6% median increase in November and a decline of 1.2% for the median in October. Clearly the industrial production situation weakened in December compared to November and the trend remains weak as well.

Among the thirteen early reporting members, six report declines in industrial production including a decline of 2.1% in Germany and a decline of 1.8% in Spain: two of the four largest European Monetary Union economies. France managed to eke out a manufacturing gain of 0.3% while Italy posted its second increase in a row, a rise of 1.7% for manufacturing industrial production in December.

These results compared to November when only two of these reporting countries showed declines and to October when 12 of 13 reporting countries showed declines with Greece as the exception logging an increase of only 0.2% in October for manufacturing output.

Sequential patterns Sequential growth patterns that track growth rates over 12 months, six months, and three months show the median gain over 12 months at a -0.8% annual rate, the median change over six months is at a -2.1% pace, and the median change over three months just at a -2% pace. The pattern falls just short of being a sequential deceleration, but it clearly is a weaking trend and a persisting contraction. Over these periods, we find only 27.3% of the reporters show manufacturing output accelerating over 12 months, 53.8% show output accelerating over six months compared to 12 months. Over three months, output accelerates in 45.5% of the reporters compared to their six-month pace. The year-on-year comparisons show output broadly decelerating - nearly universally- compared to growth rates of 12-month ago across countries. Over six months there are more accelerations than decelerations but by a small margin and over three months more decelerations than accelerations, also by a small margin.

Deceleration and Acceleration by country Austria, Germany, Spain, Luxembourg, and Ireland show declines in output on each of the three timelines. France, Italy, Malta, and Portugal show output increases on all three timelines. Output trends show persisting deceleration for Austria, Germany, France, Luxembourg, and Ireland. There is persisting sequential acceleration only in Portugal. Among non-EMU reporters in the table, Sweden and Norway show ongoing deceleration. Obviously, these results describe a great deal of weakness in train vs. a small minority of strength (Portugal!).

Quarter-to-date The quarter-to-date growth rates (QTD) show declines in five EMU members with output in one country unchanged. Output declines QTD occur in Italy, Netherlands, Spain, Luxembourg, and Greece; output is unchanged QTD in Germany. Non-EMU reporters in the table all show QTD output declines. On a QTD basis, weakness dominates strength; however, the median change on the quarter is a gain at a 0.1% annual rate of growth.

Weak growth since COVID struck Evaluating output trends since January 2020 - just before COVID came to town - we find the median net gain on this nearly 3-year period is 1%; about one third of one percentage point per year on average. It has been a period of ups and downs and weak growth overall. However, only Germany, France, Luxembourg, and Portugal log output declines on this timeline. But Germany, the largest economy in the euro area, logs a drop of 6.3%; that will drag the EMU result down considerably.

Month-to-month inflation moved higher in the EMU and across the EMU region on the month. But that masks the sharp slowing in three-month inflation that remains on the books for the EMU as a whole, for Germany, for France, and for Italy with Spain as the lone ‘large EMU economy’ exception. Even so, all four of the largest EMU economics and the EMU itself show inflation lower over three months (annualized, of course) than over 12 months. Comparing 12-month inflation to the 12-month pace of 12-months ago, inflation is still higher for the EMU, Germany, France, and Italy with Spain as the sole exception. In Spain, 12-month inflation is at 5.8% compared to a pace of 6.2% one year ago. However, comparing the 12-month inflation rate in January to the 12-month pace in December produces a mixed result with inflation lower in the EMU, Germany, and Italy, but higher in France and in Spain.

The Big picture In the big picture, the sequential trends (12-months to 6-months to 3-months) generally show inflation ratcheting lower but not necessarily monotonically. In Italy, inflation accelerates over six months before decelerating sharply over three months. In Spain, inflation decelerates over six months but then pops up over three months but still stays below its 12-month pace, keeping the general notion of deceleration intact.

Core inflation? Only Italy offers up some early core inflation. That result is not as encouraging, showing inflation higher over 12 months than it was a year ago. It shows 12-month inflation higher in January than in December and shows inflation accelerating from 12-months to 6-months to 3-months. Italy’s month-to-month inflation readings for core inflation show stubborn 0.5% increases in November and December capped by a 0.8% gain in January. The Italian core trend is a cautionary benchmark – it may not be generalizable, we don’t know.

Japan's Economy Watchers index slipped ever so slightly in January to 48.5 from 48.7 in December after reaching 49.4 in November. The future index has continued to creep up to 49.3 in January from 46.8 in December and 46.3 in November. Both the current index and the future index diffusion values reside below ‘50’ indicating that current growth and expected future growth is still expected to be weaker rather than stronger. However, the decrement for future growth is shrinking.

The rankings for these two current and future index headlines are quite similar with the current index having a queue standing at its 62.8 percentile while the future index has a 62.5 percentile standing. Although both show activity declining, the levels of the diffusion indexes are above their respective medians for the period of comparison. The data look backward over values since January 2002, a span of 21 years.

Current Index The current index does feature some strength. Eating and drinking places have a ranking in their 83.8 percentile, household responses have a ranking in their 73.5 percentile, retail has the ranking in its 75.9 percentile, services have a ranking at their 69.2 percentile, while nonmanufacturing corporations as a whole have a 54.5 percentile standing. All of those are above their 50th percentiles and therefore above their period medians. On the weaker end of things, are the overall corporate standing at a 47.4 percentile standing, that is clearly dragged down by manufacturers with a 43.1 percentile standing. Employment overall has a 39.9 percentile standing. Housing is also weak at a 40.3 percentile standing. These standings apply to the current diffusion values. They show employment, with the highest diffusion value at 51, and yet the lowest ranking among all the components. Services have a diffusion reading of 50, but the ranking that is firm, at its 69th percentile. All the rest of the current diffusion readings are below a value of 50 and signal contraction. That just gives you some idea the nature of the period that we're comparing these values with that values with diffusion this low nonetheless read as relatively firm or strong standings when compared to history.

Future Index The future index shows the most strength in retailing at a 76.3 percentile standing, followed by nonmanufacturing corporations with the 68.8 percentile standing, eating and drinking places at a 67.6 percentile standing and households at a 66th percentile standing. On the weaker end of things, again, we have employment as the weakest standing at its 38.3 percentile followed by housing with a 47.8 percentile standing and services with a 48.2 percentile standing. Looking at the diffusion values across the board, only nonmanufacturers have a reading above 50 and their reading is at 50.4 barely above the breakeven 50 mark for diffusion.