Economy in Brief: 2022

The Bank of France business indicator rose to 107.1 in February from 106.6 in January. The index stands above its 12-month average which is at 104.4 and resides above its long-term average since August 1990 by a considerable amount. The indicator has a percentile standing on that timeline at its 82.6 percentile, a relatively strong standing for this indicator. Compared to just before the COVID emergency struck, the survey indicator is up by 10.4 points indicating a reasonably robust rebound during this two-year period.

Survey standings The components of the survey are a somewhat mixed lot. The strongest parts of the survey are for employment, both employment as expected and the employment change versus last month. Both of those line items have standings in their 90th percentile, in fact, in the upper part of their 90th percentile deciles. These are the indicators that are most responsible for giving the headline such strong standing. Apart from that, the order book standing is also relatively firm, at 89.2 percentile with the standing for foreign orders at 69.9% and for the change in total new orders at 72.8%. All of these indicators are somewhere between firm-to-strong. On the weaker side are inventories that have only 59.1% standing; still above their historic median although inventories are the only variable showing a net lower standing currently than they had in February 2020 before the virus struck. Capacity usage is also weak – indicating that a lot of slack remains in the system.

Trouble in paradise? Somewhat troubling is the response ranking for expected production. Expected production has only a 24.8 percentile standing, and it only increased by 5.6 points compared to February 2020. At a 24.8 percentile standing, expected production is well below its historic median indicating some trouble with the outlook on the part of producers. However, that standing flies in the face of such a strong standing for expected employment. So, there are things in this survey that raise eyebrows and may raise some concerns. However, for the moment, the survey doesn't seem to have any consistencies in it that cause us to think that it is seriously deteriorating.

Month-to-month and recent trends Turning to the month-to-month changes, the output change variable fell to 14.1 in February from 24.6 in January and that's also a decline from its December level. Expected production has been struggling ever since COVID struck.

Overall, there are nine components and the headline. Of the nine components, six weakened in February. Six have weakened on balance over three months and five have weakened over six months.

While output change has a solid historic standing, it has in fact struggled showing declines in four of the last six months and a net decline on balance. Expected production has weakened in February and is weaker on balance over three months but is stronger over six months.

Despite weakening in February, order books show declines in only two of six months and mark solid-to-strong increases over both three-months and six-months. Changes in orders are weaker than the volume of orders on the books as both foreign order and total order changes are weaker in three of the last six months and both series are weaker on balance over three months and six months on balance.

The change in finished inventories logs a negative value in February, but it improves from November. The series chronically logs negative values. Its current reading is a touch better than its 12-month average and above its historic median. Capacity use has weakened in four of the last six months and is lower on balance over three months and six months.

Both employment gauges weakened in February from their January level. Both have very strong high 90th percentile standings. The change in employment month-to-month was positive for four months in a row before declining in February. However, expected employment is lower in two of the last three months.

Outlook and risks On balance, the French survey looks sturdy enough. As often is the case with these surveys, the jobs components stay the strongest the longest. But there is some encroaching weakness for output and more outright weakness for expected production. There is still some lingering risk of an unknown dimension for COVID to return. Related to that, there are global supply chain problems. But the new risk is the War in Ukraine. Inflation is high and stubborn in Europe and higher and more stubborn in the U.S. The war is feeding inflation by pumping up oil and commodity prices. Central banks have work to do and yet the solidity of the economy is not assured and central banks for the most part have not even ‘begun to fight.’ What will happen when they do?

German inflation rose by 0.4% in February after rising by 1.5% in January. The core rate fell by 0.3% in February after rising by 0.6% in January. Sequential growth rates show that the HICP measure of inflation for Germany rose at a 5.5% annual rate over 12 months, accelerated to a 7.8% rate over six months but cooled its pace to 7.4% over three months. Similarly, core inflation rose by 3.1% over 12 months, at a 4.1% annual rate over six months, then fell back to a 1.8% pace over three months. The bad news, of course, is that inflation in Germany remains exceptionally high; 5.5% is an extremely high headline inflation rate. The core pace of 3.1% is well above the 2% goal for inflation for the entire of the EMU area set by the European Central Bank. However, inflation in Germany is decelerating! It decelerated from six-months to three-months for the headline; for the core the deceleration is substantial and significant.

...and the details are devilishly good In addition to deceleration in the HICP, diffusion calculations show that the increases for inflation by category are actually not prevalent. However, over 12 months inflation is high, virulent, and broad-based. The 12-month inflation rate, which is at a 5.5% pace for the HICP headline, is 5.2% for the German domestic CPI. It registers a 72.7% diffusion reading. That's an extremely high reading, but that's for the year-over-year pace compared to the pace of one-year ago.

If we look at a six-month horizon, inflation rate accelerates to 7.8% from 5.5% in the HICP while the domestic gauge accelerates to 6.7% from 5.2% inflation. But over six months diffusion drops to 36.4%. This is significant. Below 50% diffusion is telling us that inflation is not very widespread. In fact, it's telling us that falling inflation is a more common characteristic than rising inflation. At 36.4%, diffusion for German inflation has already cooled broadly compared to 12-months despite the increase in the headline rate. Of course, what that means is that inflation is being carried ahead by just a few categories pushing the headline up aggressively even though that kind of inflation experience does not line up across most categories.

The three-month HICP headline shows deceleration to a 7.4% pace from 7.8%. For the German domestic inflation rate, however, there is an acceleration to a 7.4% pace from a 6.7% pace. The domestic CPI excluding energy accelerates to 3.7% from 3.5%. The domestic ex-energy acceleration is a small one, but it's different from the HICP core which showed a significant decline to a pace of 1.8%. However, when we look at the details of diffusion, we find once again that the diffusion for inflation over three months compared to six months there's only a 36.4% diffusion marker. Inflation does not accelerate broadly over three months compared to six months either.

The behavior of inflation overall depends in some sense which of these gauges you want to look at. Over three months, it's decelerating for headline inflation and accelerating for the domestic measurement; it's decelerating for core HICP or it's accelerating for the CPI excluding energy. So, what you see for German inflation depends a lot on the actual metric you want to use to measure it. However, if you look down the line at various components of the CPI report, you find that inflation is not accelerating very many places. And in most places, there is a decelerating pace over three months and over six months. That is an important consistency.

Oil It's also interesting that this is happening in Germany as Brent oil prices continue to push higher. In February Brent was 9.6% higher than in January; January was 14% higher than in December; the December Brent price did back off by 6.3%. If we look at the sequential growth rates, over 12 months Brent is up at a 61% annual rate, over six months it's up at a 91.5% annual rate, and over three months it's up at an 88.1% annual rate. Yet, the inflation metrics do not show that inflation is permeating the German economy.