Economy in Brief: January 2023

The unemployment rate in the European Monetary Union (EMU) remained at 6.5% for the second month in a row. The unemployment rate for all of the EMU ranks in the lower one percentile of where that unemployment rate has resided since April 1994. Unemployment conditions in Europe across countries are excellent and quite low compared to their historic norms.

In November among the 12 early reporting European Monetary Union members in the table, only three reported an increase in their unemployment rate: Austria, Belgium, and Portugal. Ireland saw tick up in its unemployment rate in October.

In broad terms, over three months, the unemployment rate falls in six of these countries and rises in four. Over three months, unemployment rates fall in Finland, France, Italy, Spain, Greece, and the Netherlands. Over that same three months, unemployment rates rise in Austria, Belgium, Luxembourg, and in Portugal.

Over six months, the unemployment rate for the monetary union falls by 2.5 percentage points. The unemployment rate also falls in five countries: Belgium, France, Italy, Spain, and Greece. Over the same six months, the unemployment rate rises in six countries: Austria, Finland, Luxembourg, Ireland, Portugal, and the Netherlands.

Over 12 months, the trends are much clearer cut, but the unemployment rates fall broadly. For all of EMU, the unemployment rate falls by 0.6 percentage points. Over 12 months, the unemployment rate falls in all countries except for Austria, where it rises by 0.5 percentage points, Portugal where it rises by 0.2 percentage points, and in the Netherlands where it rises by one percentage point. Greece shows the largest drop in the unemployment rate over 12 months; its rate falls by 1.7 percentage points, followed by Italy where the unemployment rate falls by 1.2 percentage points, and by Ireland where the rate falls by 0.8 percentage points.

Ranking the unemployment rates from April 1994 shows only one country to have the unemployment rate above its historic median - that's Austria with the 68.9 percentile standing. All the rest of the monetary union members have standings below their 50th percentile. Luxembourg barely ducks under that mark with the standing at its 48.8 percentile and Greece has a 47.3 percentile standing. But after those three countries, the highest unemployment rate standing is Spain at its 30.2 percentile, followed by Portugal at its 20.1 percentile followed by Italy at its 16th percentile. Unemployment rates across Europe are, broadly, historically low.

There are still high unemployment rate countries in the EMU. Spain’s unemployment rate stands at 12.4%. Greece's unemployment rate stands at 11.4%. After that, Italy is at 7.8%, France is at 7%, Finland at 6.7%, and Portugal at 6.4% and so on. The low rankings in the face of some unemployment rates that are currently still numerically high remind us that there are still structural differences across the European Monetary Union. However, a number of countries that used to carry unemployment rates closer to 15% and 20% have seen a great deal of progress on that front and no country in the table has rates anything like that.

Of course, there are still concerns. And the monetary union is benefiting from this extended recovery from COVID but at the cost of inflation that is significantly above its target rate. The European Central Bank is raising interest rates and doing so at a rather measured pace. But there is still likely to be fallout across the EMU from the ECB’s actions. We just have not seen the effects yet. When central banks fight inflation, they slow aggregate demand. The reduction in aggregate demand growth sometimes results in an outright reduction in aggregate demand and usually produces increases in unemployment. Increases in unemployment help to reduce the inflation rate that the central bank is targeting. It's an unfortunate and painful process, but that's how it works. And we are looking for these effects to visit the European Monetary Union in 2023 as the ECB continues to hike rates.

Retail sales in the European Monetary Union (EMU) rose by 0.8% in November after falling by 1.5% in October and rising by 0.8% in September. Retail sales have been gradually digging themselves out of a hole as retail sales volumes fall at a 2.8% annual rate over 12 months, fall at a 1.9% annual rate over six months, then manage an increase at a 0.4% annual rate over three months. Still, quarter-to-date retail sales volume is falling at a 2.7% annual rate.

On the other hand, motor vehicle sales and the European Union (EU) area rose by 13.3% in November, after falling by 6.7% in October, and rising by 2.1% in September. There is not a clear pattern to the growth rate of motor vehicle sales in the European Union. However, there is a consistent picture of those sales rising on all the time horizons. EU motor vehicle sales rise at an 18.6% pace over 12-months, accelerate to a 72.3% annual rate over six-months, and then ‘ease back’ to a growth rate of 35.9% over 3-months. All of these are extremely strong growth rates and suggest some ongoing recovery in the sales of motor vehicles. And, in the quarter-to-date, motor vehicle sales in EU are rising at a 36.1% annual rate.

Among the key early-reporting European countries, some of them EMU members and some of them not, there are increases in sales reported in November in six of the seven presented in the table. The exception is a decline in November in UK sales volumes. Meanwhile, Spain leads the parade of month-to-month increases with a gain of 3.8%, followed by Sweden at 2.2%, Portugal at 1.6%, Germany at 1.1%, and Norway at 0.9%.

The sequential growth rates for these countries, however, paint a mixed picture for retail sales. Germany shows declines on all the horizons from 12-months to 6-months to 3-months as does Denmark, the UK, and Sweden. Portugal and Norway show declines in all the periods with the exception that each of them has an increase over the recent three months. Only three countries in the table are EMU members: Germany, Spain, and Portugal.

EMU Member Trends: In the case of Germany the weakness in sales is diminishing as sales fall at a 5.9% pace over 12-months, that's reduced to a 4.7% pace of decline over 6-months, and that decline slows further to a -1% annual rate over one month. Spain shows outright acceleration, with sales falling 0.6% over 12-months, then rising at an 8.1% pace over 6-months, and a faster gain at a 19.3% pace over 3-months Portugal also shows sales moving to a more positive direction as they fall at a 1.3% pace over 12-months, drop at a 0.2% annual rate over 6-months, then rise at a 0.6% pace over 3-months.

Non-EMU Trends: As for the rest of the European reporters, the same progression from weaker to less weak declines holds for the most part. We see that most strongly in Norway, the condition is present for the UK. Sweden shows less weakness over 3-months than over 12-months although it shows more severe weakness over 6-months. Denmark shows weakness abating from 12-months to 6-months but then more weakness over 3-months at nearly the same pace that sales fell over 12-months appears. On balance the progression towards more strength/less weakness is stronger for the European Monetary Union member countries than for the EMU non-members.

Retail and Auto Sales Trends: The chart of retail sales volumes and passenger car registrations underscores these developments with strength in passenger car sales clearly depicted although those sales are still quite weak when compared to what historic levels of sales had been and where trends were and where they were headed prior to Covid. If we extrapolate the past to see what we would have expected at this time prior to the strike of Covid, we would expect to see levels of auto sales far superior to the ones that are being posted now, despite their current strong gains. The same is true for retail sales volumes, although the retail sales volumes did recover from Covid and then moved to even higher levels; but, since 2021 sales volumes in the European Monetary Union have continued to work their way slightly lower.

Outlook and prospects: Central banks are raising rates and with ongoing angst over the war between Russia and Ukraine, consumer attitudes within Europe have been impacted and are adversely affecting retail sales trends. Consumers are wary of what central banks are planning as they are aware that inflation is well over the top of what's targeted and they expect central banks to continue to take actions to bring inflation back into line; there are clearly concerns about what that will do to the economy. The survey data on PMIs show that, globally, as well as in Europe, there's a slowdown in progress that is now affecting both the manufacturing and the nonmanufacturing sectors. New data from the US today- although showing weakness in the US PMI statistics- also shows ongoing strength in the US job market including a decline in the unemployment rate to its cycle low in December, a largely unexpected event. With such strength and with continued firmness in wages in the United States, it seems clear that the Federal Reserve will continue to raise rates and that will put pressure on other global central banks to follow suit. It's more likely that the period ahead brings more economic weakness than some sort of recovery as the trends in retail sales in the European Monetary Union might seem to suggest. At the moment, that is a trend that will have a tough time extending itself in 2023.

The global S&P composite PMIs for December generally show weakness and declining momentum. In December, 9 jurisdictions show weakening composite PMIs compared to the month before (out of a sample of 22). Sixteen of these jurisdictions have composite PMI readings below 50 that indicate overall activity is eroding. The number showing month-to-month slowing has been diminishing from 15 in October to 11 in November to 9 in December; that's some improvement in terms of the breadth of jurisdictions reporting weakening month-to-month activity. However, the number of jurisdictions below 50, indicating outright contraction, remains high at 16 in December, the same as in November. And that number accounts for more than half of the reporters.

Large vs small country observations- In fact the count in this table is not weighted for economy-size and a quick glance at the table will show that the larger economies are showing a pronounced tendency to be below 50 and to decline month-to-month. The tendency to decline month-to-month has abated slightly in December among the larger economies (among G7 countries only France and the US erode month-to-month in December). Among G7 countries all have composite PMI readings below 50 in December, November and October save a reading of 51.8 in October for Japan (Japan has not yet reported for December, but was below 50 in November). The G6 percentile standings in December average 19%-weaker than the full sample average and median.

Thick as a bric? - The US, the UK, and the European Monetary Union have PMI readings that stand below the 20% mark in their historic queues for the last 4 1/2 years they average a standing at their 12 ½ % mark of their respective distributions. For now the BRIC countries are doing better than this, they have a 61.6 percentile standing in their historic queue (for this reading I exclude Russia) and this leaves them with readings that are above their historic medians. However, the average and median percentile standings for all members is reading is in the 20th percentile (27.3% Avg, 21.4% median) indicating significantly weak readings. Of the 22 readings in the table in fact, ten (of 22) have queue percentile standings below their 20th percentile.

More broadly... Looking at broader data over three-months, six-months, and 12 months we see more consistent readings concerning weakness and the breadth of slowing. On this smoothed basis the breadth of slowing has actually grown over the recent three months and the number of jurisdictions with an average reading below 50 over 3-months is 14, the same as it was over six-months and both of those numbers are much worse than what they reported on 12 month averages. Neither is that surprising since averaging below 50 over 12 months is an extremely weak condition.

Economic Landscape- The economic conditions for the global economy have not changed much. What that means is that inflation continues to be overshooting on a broad and significant scale. Central banks have been raising interest rates and they are continuing to raise interest rates with markets unsure where the end point for the rate hikes will lie. While inflation is overheating there are some indications that the escalation of inflation has stopped and there is some backtracking particularly based upon oil prices and commodity prices. But so far the backtracking is minor and episodic compared to the strong readings in the gauges that central banks focus on and target. And, in a recently released central bank report of commentary by central bank officials in the US, there were no members on the Federal Open Market Committee (FOMC) – no members among 18- who saw any interest rate reductions by the Federal Reserve in the year ahead.

War continues, with supply chain, fiscal, and geopolitical impact- The Russia Ukraine war continues full tilt and that continues to absorb a great deal of resources from the countries that are backing Ukraine while the war continues to be a great drain on the Russian economy that is also laboring under the weight of sanctions imposed by Western countries over Russia having instigated that war. However, and ominously, as that war drags on there's evidence of dissent within Western nations, not so much among their leaders, but within the countries among various political factions that the spending on the war is becoming increasingly unpopular. This development, of course, could encourage Russia to continue to fight even as its losing if it thinks that in the long run it can break the will of the Western countries that are supporting Ukraine. It’s a dangerous situation.

Energy- The global energy situation remains strained particularly with the United States focused on green policies and refusing to pump more oil even though it is an oil rich country while in Europe there has been some backtracking on green agendas because of the extreme strain that Europe is under and its need for energy since the Russian pipelines have been turned off. The US is helping US oil to pump more in Venezuela where some of the most sulfur-intensive, heavy oil, is found. This does not seem very ‘green’ to me… These conditions continue to be central to the way policy is run in Western countries. With China ending its zero Covid policy there is some concern that global energy demand could be rising and could strain prices again.

Policy candor? - Increasingly policymakers, even among central bank members, are talking more frankly and openly about the prospect for some sort of recession this year although this talk is quickly diverted to the topic of how any recession is likely to be moderate.

Central bankers on the hot-seat- Central bankers are having a hard time coming to grips with the fact that they played inflation very badly under Covid and it is greatly out of control because of their inattention and poor decisions. However, central banks still want to be seen as having credibility and the backbone to fight inflation and a desire to reduce it back to their target in an expeditious fashion. And while they are quite clear in stating that goal, they are much more wishy washy when it comes to explaining how they're going to get that job done. As central banks look at the future, they are far less willing to talk about doing ‘whatever it takes’ and much more prone to talk about taking some specific steps that they then argue are going to be sufficient while they worry about doing too much and about the impact on the economy. This sort of mixed-mouth mumbling does not instill faith among people in markets that the central banks have the will to achieve the objective that they claim they intend to achieve.

What markets expect... or handicap- Despite these lingering questions about central bank credibility and their backbones, markets seem to be handicapping that a less aggressive policy from the Federal Reserve in the United States will have a more pronounced economic impact. Markets see more rate cutting and sooner Fed rate cutting than the Federal Reserve is mapping out in its the so-called dot plot that provides some forward guidance on where policy is going. However, it's not clear that this is because markets think that (1) Fed policy is going to be more effective in bringing inflation down or (2) whether markets think that Fed policy is going to have a larger impact in bringing the economy down or, (3) whether markets simply view the central bank as having less of a backbone and being unwilling to continue to raise or hold rates even if inflation remains excessive once the unemployment rate begins to rise.

The future- All of this means that the future is still very much up in the air. Much of what we see going on in the world with central banks raising rates keys off of what the Fed has done and how it began to raise rates in March of last year. Most of the turbulence in global markets stems from that event. Clearly what the Fed does with policy is going to be a linchpin for the rest of the world and right now there doesn't seem to be a very clear view of what that policy will be even in the face of the Fed providing us with what it would call “guidance” and markets basically rejecting that. Remember that two years ago Federal Reserve’s “guidance" would have projected inflation around 2% and any Federal Reserve member confronted with what is now the reality of inflation would have denied the possibility of this ever occurring. Yet it has occurred. And the Fed has yet to provide us with any credible statements as to how this happened on its watch and why we should not be worried that it could happen again. Nor has the Fed said with conviction that it is prepared to do ‘what’s necessary’ to bring inflation to heel ‘quickly.’ We have gone down the rabbit hole, and it’s a different world in this wonderland than the one Paul Volcker lived in. The dual mandate lives, and both prongs of the mandate are equally important…except one prong may be more equal than the other. Once the central bank does what Volcker refused to do- take responsibility for unemployment in the short run- we are in a different realm. Your anti-inflation Fed decoder ring no longer works here. Just pat attention to what the Fed says and that is clear…