Economy in Brief: June 2023

ZEW Overview The ZEW economic index weakened for the current situation in June, worsening for the euro area, for Germany, and for the USA. On the other hand, economic expectations improved slightly, but the emphasis here is on ‘slightly’ as economic expectations for Germany and the U.S. remain quite weak and depressed.

• Inflation expectations continued to post large net negative readings. Inflation rates continue to run high in the euro area, in Germany, and in the U.S. with a few ZEW experts thinking the conditions could worsen from where they are as central banks raise rates.

• Short-term rate expectations, on the other hand, are slightly weaker than they were in May. In the euro area, expectations have a ranking in their 86th percentile, reflecting the fact that the ECB is much farther behind raising rates relative to its inflation target. In the U.S., the short-term rate expectation index has only a 35.6 percentile ranking because the Federal Reserve has already raised rates substantially and there is, in the U.S., an ongoing to debate about whether the Fed is going to pause at the meeting this week, and then possibly continue to raise rates, whether it will raise rates at the meeting itself, or exactly where Federal Reserve policy stands. This uncertainty and ambivalence is reflected in this ZEW survey values.

• Long-term rate expectations are weaker in both Germany and the U.S.; both have fallen significantly in June compared to May acknowledging that inflation progress is detectable and that long-term interest rate investors may feel less at risk to what lies ahead.

• Stock market assessments of the euro area, Germany, and the U.S. all improved and all switched from a net negative reading in May to a net positive reading in June. But all the queue percentile standings remain extremely weak. The U.S. standing at nearly its 20th percentile is the strongest of the lot, a reading that itself is still quite weak.

Today’s UK data revealed a still-tight labour market thanks to evidence showing another drop in the unemployment rate and an acceleration in nominal wage growth. This will increase concerns that the Bank of England will hike interest rates again in the coming weeks in order to quell inflationary pressures.

Noteworthy details of the report were as follows-

• The unemployment rate decreased from 3.9% in the three months to March to 3.8% in the three months to April, defying UK economists’ expectations for an increase to 4.0%.

• The employment rate exhibited positive growth, reaching 76% in the latest quarter compared to 75.9% in the previous three months. That increase propelled the number of people employed to a new record high, surpassing pre-pandemic levels for the first time.

• The estimated number of job vacancies fell by 79k on a quarterly basis, resulting in a total of 1051K vacancies. This marks the 11th consecutive period with a decrease in vacancies.

• As for wages, both average total pay (including bonuses) and regular pay exceeded economists’ predictions. Average total pay saw growth of 6.5% in the three months to April, while regular pay saw a larger climb of 7.2%. That said, real wage growth, (i.e. adjusted for inflation) continued to lag behind and fell by 2.0%y/y.

• The economic inactivity rate fell by 0.4 percentage points to 21.0% in the three months to April. That decline was largely driven by those inactive for other reasons and those looking after family or home. Meanwhile, those inactive because of long-term sickness increased to a record high.

Japan's producer price index fell by 0.4% in May after turning up a flat performance in April and a flat performance in March. For all manufacturing, the PPI rose by 0.1% in May after rising by 0.2% in April and by 0.3% in March; the progression to smaller increases is in train month-to-month for manufacturing even if its broader progression is blunted.

PPI progression The progression from 12-months to 6-months to 3-months finds Japan’s PPI up at a 5.1% annual rate over 12 months and at a 0.5% annual rate over 6 months; then it falls at a 1.7% annual rate over 3 months. Japan's manufacturing PPI rises 4.5% over 12 months, then decelerates to a 2.4% annual rate over 6 months as well as over 3 months.
Global PPI disinflation is in gear...so what? Referencing the chart at the top, we can see that this tendency for the PPI to have run hot and then to decelerate sharply is part of an international phenomenon and one that seems to be strongly linked to energy prices (see the correlations to Brent in the table – not the CPI exception). The chart looks at year-over-year percent changes in various PPIs and plots them against the Brent price level that is chronicled on the left scale of a two-scale chart above. But it is not driving the trends central bankers care most about.

The PPI is NOT the index favored by central bankers For producer prices, raw materials, energy, commodities, agricultural goods - all these things - are extremely important. After energy prices had flared along with other commodity prices, they decelerated and this is having a global impact on producer prices; in fact, producer prices are falling much faster than consumer prices - the price indexes that central banks typically look at to set monetary policy.

Consumer prices rule! In the U.S., in Europe, and in the U.K., consumer price gains have long been too high, and they have continued to be stubborn, resistant to slowing enough in the face of these severe drops in producer prices. Markets, to some extent, are confused because, in the past, producer prices have been reasonable harbingers of consumer prices, but we also know that producer prices yield exaggerations of the moves to come from consumer prices. Even in Japan, consumer prices now are failing to show the kind of slowing outside of energy and food prices that the central bank had been expecting. Japan's inflation ‘problem’ is not as bad as the rest of the world. But Japan’s consumer prices are overshooting the Bank of Japan target. The BOJ has been arguing that the rise in inflation is temporary; the central bank has, for the most part, been ignoring it. But maybe now there's something percolating in the price index that Japan is going to have to pay some attention to. Japan may be in the process of becoming less of an exception.

Brent is still an inflation moderator The table still shows that energy is a negative factor, as Brent prices decline 11.5% month-to-month in May after having increased 2.7% in April and fallen 4.8% in March. There is no pent-up pressure coming from oil prices according to Brent. Sequentially Brent price changes are also still negative.

Global trends compared and contrasted Japan gives us the first inflation observation from May; for other countries we're looking at data up-to-date through April: for the European Monetary Union and for the U.S. and in comparison with Japan's own CPI. We can look at the sequential price trends and there we see U.S. and European PPIs showing decelerations from 12-months to 6-months to 3-months. Japan's CPI also shows decelerations from 12-months to 6-months to 3-months. But Japan’s CPI core shows an acceleration from 12-months to 6-months to 3-months. For comparison, I also reoffer Japan’s PPI on a one-month lag basis so we can compare it to the other indexes on the same, albeit less topical, timeline. On that basis, Japan's overall PPI still shows steady deceleration, but the manufacturing gauge shows the deceleration from 12-months to 6-months and then from 6-months to 3-months a very slight pickup: from 3.3% at an annual rate over 6 months to 3.5% at an annualized rate over 3 months. As far as comparisons go, it is hair splitting to call that ‘acceleration.’

In April, manufacturing IP among select early reporting EMU members and other European economies fell in nine of the fifteen countries in the table. Among the 13-early reporting EMU members, the median manufacturing output decline was 2% in April. The percentage of EMU economics with IP accelerating month-to-month remained low at 38.5% in April compared to 30.8% in March. In February, output showed a preponderance of acceleration (69.2%).

Sequential growth Over three months, six months and 12 months, IP among EMU members showed declines in the median gauge, but the drop is not worsening persistently as the annualized output drop over six months was less than the drop over 12 months. But then, the median drop over three months accelerated again surpassing the speed of the drop over both six months and 12 months.

Manufacturing output momentum EMU members show the proportion of members with output acceleration at or below 50% on all horizons. In addition, over three months, manufacturing output declines in nine of fifteen reporters in the table, eight of fifteen reporters over six months, and eight of fifteen over 12 months. Output is not just weak, but it is declining in a preponderance of European economies. Germany, the largest EMU economy, shows manufacturing output down over three months but rising over six months and 12 months. France, the second largest EMU economy, has no output declines over these periods. Italian manufacturing output declines each of the periods. Spain, the fourth largest economy, shows output declines over three months and 12 months. So far, the largest of the large economies in the EMU show the most resilience. But Germany gives way to an output decline over three months. In addition, Belgium, Finland, the Netherlands, Portugal, and Norway- in addition to Italy- show output declines over each of the three periods. Only the Dutch and Norwegians show progressive deterioration in this group. However, Germany, with only one output decline over three months, shows progressive slowing in growth from 12-months, to 6-months, to 3-month; so, do Malta and Ireland, two of the smaller economies.