Economy in Brief: July 2023

Industrial output in the European Monetary Union in May rose by 0.2%. This is the headline series excluding construction. The gain follows a rise in output of 1% in April and a much sharper fall of 4.4% in March. The incidental growth rate for output in May occurs amid a challenging period for output, a profile that is declining and unraveling at an increasingly rapid pace. Output falls by 2.1% over 12 months; over 6 months it falls at a 4.7% annual rate and over 3 months it falls at a 12.5% annual rate. The trends for output in the EMU are weak.

Quarter-to-date The quarter-to-date result for the headline shows output is falling at a 9.1% annual rate. Manufacturing output falls on the same deteriorating pattern as the headline with progressively deteriorating results. Manufacturing shows output falling at a 13.8% annual rate, two months into the second quarter. Manufacturing is quite weak.

Sectors Turning to sector results, consumer goods, intermediate goods, and capital goods log month-to-month increases in output across the board in May. In April, consumer goods output declines by 2.6% month-to-month, intermediate goods output falls by 0.9%, while capital goods output surges by 14.7% month-to-month. However, in March consumer goods output declined, intermediate goods output declined, and capital goods output plunged by 14.9%. Therefore, the sharp gain for capital goods in April was simply a bounce back from an even sharper loss in March. On balance, the sectors largely show the same deterioration as the headline in manufacturing.

Sectors sequentially Viewing the sectors sequentially, consumer goods output falls 3% over 12 months, falls at a 9.4% annual rate over 6 months and then falls at an 11% annual rate over 3 months. The consumer sector follows the pattern of across-the-board declines and generates a progressive series of decline that has output falls accelerating. Capital goods offer their own twist with a gain of 1.3% over 12 months; that gain diminishes to a rise at a 0.2% annual rate over 6 months and then gives way to a decline of 5.3% at an annual rate over 3 months. Intermediate goods follow with the only exception to the ever-deteriorating trend displayed by the headline, by manufacturing, and by other sectors. However, it's a modest deviation; as intermediate goods output falls on all horizons, it falls at a 5.4% annual rate over 12 months that's reduced to a 4.7% pace of decline over 6 months and then it returns to a 5.4% annual rate decline over 3 months. None of that makes the intermediate good sector look any healthier than the rest of output.

Quarter-to-date by sector On a quarter-to-date (QTD) basis, consumer goods output is falling at a 7.3% annual rate, intermediate goods output is falling at a 2% annual rate, and capital goods output is falling at an 18.7% annual rate. Within consumer goods, consumer nondurables are showing a decline in the QTD at a 9.7% annual rate. That contrasts to an increase in durable goods output that's expanding at a 2.3% annual rate, about midway through the second quarter.

By country... Output trends across EMU members in May show us declines in output in five of the 13 members shown in the table. The largest economies are still reporting gains in May with Germany posting a 0.2% rise in output, France a 1.4% rise, Italy a 1.4% rise, and in Spain a sizable, 8.1% annual rate increase. However, monthly data are ragged and irregular. In April, nine of 13 member countries in the table logged output declines. In March, eight of the 13 countries logged output declines.

Countries sequentially Sequentially EMU countries show output declines over 3 months in 10 of 13 countries. Over six months 7 countries show output declines; over 12 months the same seven countries show output declines. In fact, there are seven countries that report output declines on all three horizons, those are: Austria, Belgium, Italy, the Netherlands, Luxembourg, Ireland, and Portugal. Among those countries, the sequential declines are getting progressively worse in Austria, Belgium, the Netherlands, Ireland, and Portugal.

Isolated strength Only Finland, France and Spain show output increases on all three horizons. Finland shows progressive strength with growth moving up from 0.7% over 12 months to a pace of 3.6% over 6 months to a pace of 9.8% over 3 months. Spain also shows progressive acceleration with output moving from 1.1% over 12 months to 11.4% annualized over 6 months to a pace of 21.8% over 3 months.

Nonmonetary union Europe Clearly weakness in the monetary union dominates strength; it would be surprising to see the strength in these few economies hold up given the weakness and that abounds in the euro area around them. However, at the bottom of the table, we see that there is more strength for nonmonetary union members. Sweden and Norway both show output increases over all three timelines, but persisting growth is not building momentum. The U.K. shows output increases over three months and six months after it logs a 1.2% decline over 12 months.

QTD by country In the quarter-to-date, output is falling in all the members (in the table) except for France and Greece. Finland that has a string of output increases blogs are minus 1% contraction in the quarter-to-date.

Dutch goods trade moved to a greater surplus in May as exports rose by 0.6% and imports fell by 3.0%. Nonetheless the sequential profiles for exports and imports both continue to point to the implosion of trade flows. Goods exports are falling by 3.4% over 12 months, falling at an 18% pace over 6 months, and falling at a 21.5% pace over 3 months. For goods imports, there's a decline of 7.2% over 12 months, a decline at a 15.8% pace over 6 months and then a decline at a 19.3% pace over 3 months. Exports and imports are sequentially falling as well as worsening their rate of decline.

The Netherlands is at the crossroads of Europe; it does a great deal of trading as many goods flow as transshipments through the Netherlands. The Dutch statistics are about trade originating from the Netherlands and exclude the transshipments that come through the economy from other European states. The Dutch economy, however, is very plugged into the world economy as far as international trade is concerned.

The negative trends that we see from exports and imports here are disturbing because they've turned sharply negative so quickly. Export and import gains were very strong toward the end of 2022; then all of a sudden the bottom began to fall out and since that point there has been a very steady deceleration in the growth of exports and imports. The Baltic dry goods index chronicles the slow down in world trade. The recovery of world trade flows from the COVID recession peaked late in 2021 and then fell off sharply in early 2022, had a small rebound, and has since continued to wither into lower territory. According to this index, world trade flows continue to wind-down.

German inflation accelerated in June rising by 0.7% month-to-month compared to falling 0.2% in May. The HICP core rate rose by 0.8% after a flat performance in May. The pattern for the HICP inflation rates in Germany’s domestic CPI headline and core, while showing similar trends to the HICP, also shows very different magnitudes. The German CPI accelerates to 0.3% in June after falling by 0.1% in May. The CPI excluding energy rose in June by 0.4% after being flat in May. The accelerations experienced in the domestic indexes month-to-month are far below the accelerations experienced in the HICP measure.

Inflation diffusion as the arbiter The table calculates diffusion data based on the domestic CPI data. Diffusion data look across the various categories and calculate the breadth of the price increases period-to-period. The diffusion data presented in the table follow the practice for the U.S. ISM where diffusion is calculated as the percentage of inflation increases month-to-month plus half of the percentage that are unchanged. Inflation diffusion above 50% indicates that there is more acceleration than deceleration on the period. Below 50% there is more deceleration than acceleration across CPI categories. Inflation diffusion in April month-to-month was very narrow even though the headline showed that the domestic CPI rose by 0.1%; diffusion in April compared to March was only at 9.1%- extremely little inflation acceleration occurred in the month. However, diffusion stepped up sharply to 54.5% in May. This indicates inflation was accelerating in more categories than it was decelerated but by a very small margin. And this is even though, in May, the headline for inflation fell month-to-month after rising the month before. Essentially the diffusion calculation from May was saying that the headline exaggerated the beneficial trend for inflation. And that turns out to be true. In June we see the inflation metrics indicating a 0.3% headline gain and a 0.4% gain in the CPI excluding energy. But once again inflation diffusion remained at only 54.5%, barely showing inflation accelerating in more categories than it was decelerating. On balance, despite the headlines on the HICP, German domestic inflation data suggest that inflation is not increasing by much month-to-month. It sees June more as a hiccup in inflation. The HCP measure appears to be exaggerated. Supporting this view, Brent energy prices fell in each of the last two months as well.

Sequential trends Sequential data that measure inflation over 12 months, 6 months and 3 months on the HICP shows that there is a steady deceleration of headline inflation from a 6.9% pace over 12 months to a 4.3% pace over 6 months to a 2.9% pace over 3 months. This deceleration is echoed by the HICP core measure.

The German domestic CPI measure also shows inflation decelerating with the headlines displaying 6.4% inflation over 12 months, a 5.7% pace over 6 months, decelerating to 1.4% pace over 3 months. And like with the HICP core, the CPI excluding energy also shows inflation decelerating, in this case, from 6.7% over 12 months to a 4.9% pace over 6 months to a 2.1% annual rate over 3 months.

Sequential diffusion Diffusion data are calculated from the domestic CPI data. They show inflation over 3 months with diffusion at 27.3%; this compares the 3-month inflation rates across CPI components to their performance over 6 months. Over 6 months diffusion is 36.4%; this measure compares 6-month inflation rates across components to component inflation over 12 months. Over 12 months the diffusion measure is hot, showing a 72.7% pace; this compares inflation by category over 12-months to what it was across components 12-months ago. Interestingly, the comparison of 12-months to 12-months ago shows a headline of 6.4% over 12 months as of June 2023; this compares to 6.6% twelve-months ago. The CPI ex-energy is at 6.7% over 12 months currently, compared to a 4.4% twelve-month pace twelve months ago. The diffusion measures confirm and reinforce the notion from the HICP headline and core and from CPI headline as well as ex-energy measure that inflation has been decelerating and that the deceleration is widespread.