Economy in Brief: November 2023

Inflation in Germany fell by 0.2% in October on the HICP measure; the core rose by 0.2%. The German domestic measure inflation was zero while the domestic CPI excluding energy rose by 0.1%. On all these metrics inflation performed quite admirably in the October report.

Not only was the October report good, but in terms of the HICP measure September was excellent as well. In September the HICP had been zero, but the core fell by 0.2%. On the German domestic measure, the CPI was up by 0.3% in September while the CPI excluding energy was up by 0.2%. September numbers for the domestic measure were not as stellar; they were mixed with the 0.3% headline gain being too strong (3.7% annualized).

Germany’s HICP- Okay, the sequential inflation numbers are behaving- trending. The HICP headline rises by 3% over 12 months, at a 2.4% annual rate over 6 months, and it decelerates to a 1.3% annual rate over 3 months. The core rate on the HICP measure is up 4.9% over 12 months. It settles down to a 3.2% annual rate over 6 months and clocks in at 1.6% at an annual rate over 3 months. That is good progression and once again it brings the 3-month inflation rate down to within the target that the European Central Bank seeks for the euro area as a whole.

The German domestic gauge- The inflation rate for Germany's domestic measure does not perform quite as well. The inflation rate is at 3.7% over 12 months, that decelerates to a 2.4% pace over 6 months then picks up to a 3.1% annual rate over 3 months. It refuses to dip down inside of the ECB's preferred target band. The German domestic measure for ex-energy inflation rises at a 4.5% annual rate over 12 months, cruises at a 2.7% annual rate over 6 months and then picks up to a 2.8% annual rate over 3 months, once again refusing to fall into the prescribed target range of the European Central Bank.

Diffusion- Diffusion calculations are executed on detailed domestic data. They show some progress but not the same excellence as the HICP. The HICP is a measure crafted to fit across all EMU members and since members could not agree on how to treat housing costs, they are absent from the HICP. Diffusion values over 50% indicate prices increasing period-to-period faster more than slower while under 50% prices are slowing more than accelerating.

Diffusion results- Diffusion in the domestic measure shows a reading of 63.6% comparing 12-month price increase to those of one year ago across all major commodity groups. The diffusion measure falls to 27.3% when applied across groups to 6-month price changes annualized against 12-month changes. However, over 3 months the diffusion metric rises to 45.5% comparing the 3-month trend to the 6-month trend across categories- close to the neutral 50% mark. These diffusion data are poor for the 12-month gauge, excellent over 6 months, but then giving a constructive, but weak signal over 3 months.

German capital goods trends continue to turn lower in September as industrial production declines; the losing streak for monthly German industrial production now stretches to four months in a row as output falls at a 7.6% annual rate over 3 months faster than its 6.2% annual rate drop over 6 months which is faster than its 3.9% drop over 12 months.

Broad weakness in output across sectors- The weakness in output at the headline level is echoed by two of the three component sectors and barely violated by one of them. Consumer goods output falls at a 9.6% annual rate over 12 months, falls at a 12.3% pace over 6 months and falls at an extremely weak 23.6% annual rate over 3 months. Capital goods output that manages an increase of 1.2% over 12 months falls at a 3.1% annual over 6 months and then falls at a stepped up 4.1% annual rate over 3 months. Intermediate goods output falls at a 6.1% annual rate over 12 months and falls at nearly the same pace (slightly less, at a 5.7% rate decline) over 6 months but then accelerates to an 8.5% annual rate decline over 3 months. Despite the slight 6-month prevarication, in the trend for intermediate goods deceleration, the signals from industrial output across sectors give a very clear sign of deepening weakness in German manufacturing.

Construction- Construction output goes its own way a bit more, rising by 2.1% in September, falling in August and rising in July. Construction shows no clear trend in output, but output does rise over 12 months and over 3 months.

Mainline reports are weak- The mainline reports of manufacturing output, real-orders, and real-sales, show deterioration and all but real orders are consistent with the notion of secular deterioration at an accelerating pace.

Other indicators’ surveys Surveys show mixed results for changes in values between September and August. However, all surveys show deterioration from 12-months to 6-months and from six months to 3-months based on average data. All surveys are deteriorating on a quarter-to-date basis (that’s with Q3 data now complete).

Selected other Europe The four countries for other Europe that represent early reporters of industrial output show declines across the board in September. All show IP declines over three months as well; only Portugal shows less weakness over 3 months than over 6 months. All also show declines in IP over 12 months. The pace of the year-on-year declines is replicated or worsened over 6 months except in France.

WEAKNESS! What emerges from these considerations is a clear picture of deterioration and generally of worsening growth according to IP and indicators for Germany. Industrial output trends for Portugal, Spain. France, and Norway follow suit. It’s a grim picture for manufacturing in September in Europe.

German real orders unexpectedly rose in September; however, it's not the surprise that it may seem on the surface. They gain in order was only 0.2% following a 1.9% rise in August; while a gain of 0.2% after a gain of 1.9% might seem significant, those two months followed a decline of 11.4% in July. Because of that, the profile of German orders continues to be negative, with real orders falling 4% over 12 months, accelerating to rise at a 7.1% pace over 6 months, then diving to drop at a 33% annual rate over 3 months.

Foreign real orders rose by a strong 4.2% in September after a 1.6% gain in August. Those two brisk increases follow on the heels of a much more substantial 12.7% decline in orders in July. Foreign orders rose by 0.8% over 12 months, rose at a 19.9% annual rate over 6 months, then fell at a 27.3% annual rate over 3 months. And 12-months ago year-on-year real foreign orders were falling 13.8%. The table (below) depicts an isolated island of revival in foreign orders over the last 12 months and 6 months that previously had shown order declines and is doing so again over three months. The foreign sector hardly looks like a back-bone of growth to support the German economy through the export sector.

German domestic orders fared much worse, falling by 5.9% in September, rising by 2.3% in August, and falling by 9.2% in July.

Sequential orders fell by 11% over 12 months, fell at a similar 10% annual rate over six months and fell at a 41.4% annual rate over 3 months.

None of these categories make orders look anything like ‘firm’ or ‘solid,’ let alone ‘strong.’ But the domestic situation is clearly the worst.

Sales trends- abysmal Real sales trends across sectors show declines in all categories in September. All categories show declines over 3 months as well. Over 6 months, only capital goods showed a rise with the other metrics for real sales falling. Over 12 months, again, all categories showed declines except for capital goods sales. Real manufacturing sales declined by 2.5% over 12 months. That improved technically to a 2.4% annual rate drop over 6 months, then, over 3 months sales plunged at an 11.3% annual rate.

QTD trends Quarter-to-date (QTD) trends show orders falling overall as well as for foreign and domestic orders – led by extreme domestic weakness. Real sales by sector register declines in all categories as well, led by weakness in consumer durables.

European conditions Industrial confidence, according to the EU Commission measures, shows net negative readings in September for Germany, France, Italy, and Spain. Month-to-month conditions improved in Germany and France but deteriorated in Italy and Spain. Over 3 months, however, all four countries show conditions weakening; conditions also weaken over 6 months compared to 12 months. In the quarter, all four countries have EU Commission readings that are below historic median in each of these countries.