Economy in Brief: 2022

Irish inflation gained 0.3% on its HICP measure in February; that's down from 0.4% in January and level with December’s 0.4% gain. Year-over-year Irish inflation is running 5.7% and increases to a 6.7% annual rate over six months but falls back to a 4.2% annual rate over three months. Ireland's domestic CPI measure tracks the results for the HICP monthly; the sequential trend is also very similar to what the HICP posts over 12 months, six months and three months. On balance, Irish inflation appears to have stopped accelerating, but it isn't clear whether this is a pause or whether there's more to come.

The domestic CPI measure has a core rate available. The core rate for Ireland shows a 3.7% gain over 12 months, a 3.3% annualized gain over six months, and that pace ticks up to 3.5% over three months. For Ireland, the core inflation performance is relatively flat and there is a hint that inflation may be stable in the neighborhood of 3.5% (still well above the ECB’s 2% objective for inflation in the EMU area). However, it's still hard to tell and certainly hard to tell with so much pressure still present in the headline and with global oil prices and commodity prices showing so much pressure and volatility themselves. On a quarter-to-date basis, the HICP for Ireland is up at a 4.8% annual rate (that's two months into the quarter). The domestic CPI measure is up at a 4.7% annual rate QTD, nearly the same as for the HICP. However, the core CPI is up at only a 1.7% annual rate in the unfolding quarter which is not only mild but it's within the overall target band sought by the European Central Bank. Can things really be that good this soon?

Is the Irish CPI smiling? The domestic Irish CPI shows 11 major components for inflation; these show the annual inflation rate is up with a breadth of 66.7%. That kind of diffusion (approximately acceleration in two-thirds of the CPI categories) is quite high and disturbing. Over six months, the diffusion ranking falls back to 58.3%, still showing acceleration with uncomfortable breadth. However, over three months, the diffusion measures steps back to 41.7% to accompany its milder pace. That's below the 50% mark and 50% is the dividing line between inflation accelerating or decelerating. Over three months, inflation is decelerating in more categories than it's accelerating and for Ireland this is a potentially significant result and potentially a signal that inflation it's not pausing before accelerating but is pausing because it's not going to be accelerating.

Extreme price moves over three months Still, there's still plenty of inflation in Ireland and a lot of categories that are quite troublesome. For example, prices for alcohol are increasing at a 27.8% pace over three months. Rent and utilities as an aggregate category shows inflation up at a 9.9% annual rate over three months. The recreation and culture category shows inflation at a 5.6% annual rate over three months; food prices are up at a 6.8% annual rate over three months. Balancing those clear excessive gains are communication where prices are declining at a 3.9% annual rate, education where prices are falling at a 3.7% annual rate, and the catch-all ‘other’ category where prices are declining at a 4% annual rate.

Italian industrial production for manufacturing (IP) fell by 3.4% in January. This is the second decline in a row for manufacturing industrial production. In December, IP had fallen by 1.1%. All major sectors’ industrial output fell in January. Consumer goods output fell by 3.6% month-to-month, capital goods output fell by 1.6%, and intermediate goods output fell by 3.4%. None of these sectors showed increases in December either. However, in December, consumer goods output was flat while capital goods output fell by 2.2% and intermediate goods output fell by 0.6%.

With this sort of weakness over the last two months, it's not surprising that over three months industrial output is declining in double digits. In fact, looking back over the last 12 months, six months and three months, manufacturing industrial production in Italy falls on all those horizons and its decline gets increasingly large over shorter periods. Over 12 months Italian manufacturing industrial production falls by 2.4%, over six months it falls at an 8.3% annual rate, and over three months it falls at an 11.6% annual rate. Italy’s industrial sector is struggling.

Sectors and sequential weakness Looking at Italian output by sector, consumer goods, capital goods and intermediate goods, there is decelerating output in just about all three sectors. All three sectors showed declines in output over three months, six months and 12 months. The declines are at progressively greater rates of shrinkage in all cases with the exception of capital goods. That exception is only a technical exception as the pace of output decline registers a -7.7% pace over six months; that improves to -7.1% over three months, a small ‘technical’ improvement but still a very large negative rate of decline. Capital goods really aren't an exception to the rule of deceleration and growing weakness across all the sectors when you really look at it broadly.

Quarter -to-date weakness In the quarter-to-date, manufacturing output is declining at a 20% annual rate. For consumer goods, the decline is at a 20.2% annual rate. For capital goods, the decline is at a 13.5% annual rate and for intermediate goods, it's at a 19.7% annual rate. There are double-digit rates of declines overall and for all sectors. That indicates considerable outright weakness on the part of the Italian manufacturing sector. It's no wonder Italy is fighting to try to maintain energy imports during this time that many countries are pushing for an embargo on energy from Russia. The Italian economy relies on Russian energy, and given the state it's in, it's hard to imagine what sort of shape it would be in if Italy’s energy shipments were suddenly cut off.

Italian manufacturing since COVID struck Looking at Italian industrial production and its recovery since COVID struck, all sectors show a lower level of activity than they had in January 2020. Overall manufacturing is 4.2 percentage points lower, the output of consumer goods is 6.6 percentage points lower, the output of capital goods is 3.9 percentage point lower, and the output of intermediate goods is 1.1 percentage points lower.

Percentile rankings of Italian growth rates Evaluating the 12-month growth rates for all sectors, we find the overall standing for Italy is in its 27th percentile. This means that the growth rate has been weaker only about 27% of the time since 2000. The consumer goods sector has a 49.6-percentile standing; that's very close to its median and is the best showing of any of the sectors. The capital goods sector has a 30.7-percentile standing and intermediate goods have a 21.6-percentile standing.

Industrial indicators for Italy are much more upbeat Going beyond the industrial production data, we can look at various indicators for the Italian industrial sector. The EU industrial indicator for Italy, in fact, has a 94.3% outstanding based upon the level of its index value. The statistical agency Istat sees current orders for Italian economy at a 98.9-percentile standing indicating a very high level of orders. The Istat outlook for production is at a 77.6-percentile standing. These surveys of Italian activity are really quite different from what we see when we look at actual industrial production and look at the increases that Italian factories are experiencing on the ground. Clearly, people answering the surveys are somewhat more optimistic when they look at and evaluate the state of conditions or when they form their expectations for the future. It's also true when we look at these indicators that all of the indicator evaluations are made based on levels of the indicators not on their growth rates. But if we were to evaluate the indicators based on year-over-year changes, they would be quite strong as well.

Since COVID struck Compared to their levels in January 2020 since the COVID, all of the indicators have improved. However, if we look at the indicators in the current quarter-to-date, all of them are showing weakness. The EU industrial confidence indicator is down by nearly one point, the Istat current orders index is down by about 3/4 of a point, while the Istat outlook index for production is down by 1.7 points.

Summing up Survey data are much more upbeat in the assessment of the Italian economy when compared to the industrial output. Output shows that, in real time, on-the-ground conditions are poor and they've been bad for quite some time. There's a deceleration in progress and it is deceleration of some significant magnitude. The chart that compares Italian PMI index for manufacturing to industrial production index shows that once again the PMI index for manufacturing is much stronger than the output index and is still above the level of 50 pointing to manufacturing expansion. But in the survey, we see that the PMI is in a declining trend.