Economy in Brief: March 2023

German inflation continued to run hot in February. The HICP gain in the month of 0.6% was stronger than January's 0.4% while the core rate accelerated to 0.7% from January's 0.3%.

Overview- Germany logs a year-on-year HICP gain of 9.2% in February which is stronger than January's 9.1% but lower than its string of increases from September to December of last year; a string in which the German headline year-on-year inflation rate peaked out at 11.5%. The core year-over-year rate of 7.4% in February is a sharper rise than its 7.0% year-on-year increase in January. That marks a new cycle high for the annual core inflation rate! That's certainly not a good development for inflation prospects in Germany.

HICP some deceleration some mixed performance- However, because of a slowdown and, in fact, the decline in the headline month-to-month HICP in December, Germany's headline inflation rate shows deceleration in its broader sequential trends. Its 9.2% gain over 12 months softens to 8.9% over 6 months, and over 3 months the annual rate increase is at just 1.6%. The core rate is a bit less cooperative with a 7.4% gain over 12 months rising to an 8.7% gain over 6 months but edging down to a 5.9% annual rate over 3 months.

CPI excluding energy- Germany's domestic CPI measure shows a similar deceleration in the headline. But for the CPI excluding energy the German domestic CPI shows a year-over-year gain of 7.6%, rising to 8.3% over 6 months and then falling back only to a 7.1% annual rate over 3 months. That 3-month pace for the CPI excluding energy is below the 12-month pace, but the 7.1% compared to 7.6% is still not much progress and still a very high rate of inflation for an ex-energy measure.

Diffusion of inflation monthly- On balance, the German headline and core trends are not very encouraging this month. Looking at the diffusion that measures the tendency for inflation to accelerate, there was a great step down in December where diffusion fell to only 9% which means 91% of the categories were showing inflation decelerated in December compared to November. in January diffusion stepped up to 36% and in February it stepped up again to 45%. But both these gauges show that inflation is accelerating month-to-month and in fewer than half of the categories. These calculations do not use any weighting.

Sequential diffusion- Sequentially the diffusion indexes show that inflation is accelerating over 12 months compared to 12-months ago in about 82% of the categories. Over 6 months inflation is accelerating compared to its 12-month pace in about 64% of the categories. Over 3 months inflation has accelerated in only about 45.5% of the categories. Still 45.5% is not that decisively below the break-even which is at 50%. Diffusion trends are somewhat encouraging but given the height of inflation I would mark them as still inadequate.

Oil prices- Underlying a lot of what's going on with inflation is oil prices and we have Brent prices denominated in euros memorialized at the bottom of the table. Brent prices are down compared to a year ago by 5.9%, they're down over 6 months at a 34% annualized rate, and they're down over 3 months at a 42% pace. Monthly data show Brent prices fell by 13.6% in December, they rose month-to-month by 1.4% in January and then they fell by just 0.3% in February. The help on inflation reduction that's been coming from oil prices appears to be diminishing substantially for Germany. Meanwhile, inflation diffusion while showing some deceleration is not showing very impressive results.

Sweden's GDP, fell at a 2% annual rate in Q4 2022 with private consumption falling at a 1.5% annual rate and public consumption rising by nearly a percentage point at an annual rate. Capital formation has become suddenly very weak, falling at a 3.8% annual rate. Exports are expanding at a 1.8% annual rate; imports are falling at a 3.6% annual rate, undoubtedly reflection of the weak private sector demand and the decline in capital formation. Domestic demand in Sweden falls at a 9.8% annual rate in the fourth quarter adding to a 2.3% annual rate decline in the third quarter. Both of these followed a super-sized 12.5% annual rate gain in Q2 2022.

Sweden’s year-over-year trends show that the robust gains in domestic demand that held through the second quarter of 2022 have come under pressure and given way to a year-over-year decline by the fourth quarter. This is also reflected in a weakening of imports that were running double-digit growth rates until the fourth quarter when the pace slowed to 4.2%. Reflecting conditions abroad, Sweden's exports also have slowed, but not as dramatically as imports. They have backed off from growth rates of 8.5% to 6.5% to a 5.3% annual rate in the fourth quarter. Capital formation growth rates are about half of what they were and in preceding quarters on a year-over-year basis. Public consumption has been slowing. It had been relatively strong through the fourth quarter of 2021 but in 2022 it slowed quite dramatically and it's growing only 0.3% year-over-year in the fourth quarter. At the same time private consumption has slowed sharply from growth rates of 5% to 9% to year-over-year growth of just 0.2% in the third quarter and -2% in the fourth quarter. All of these swings in GDP components translate into a GDP number overall that is faltering. It had seen growth since the third quarter of 2021 fluctuate between growth rates of 4% to 6%; then it suddenly slipped in the third quarter to a 2.5% growth rate and in the fourth quarter to a decline of 0.1%. Clearly Sweden is struggling in terms of GDP growth although the recent monthly tally is looking better.

Sweden's monthly GDP estimate shows a gain of 2% monthly in January reversing what was a 0.7% fall in December. Exports and household consumption added to the positive momentum from government production. The January gain brought the year-over-year gain to 3.6% following what was a 1.5% drop in the previous month on the same basis.

The monthly gaining GDP was boosted by a rise in industrial production; it showed a 4.4% gain in January over its year-ago level, much stronger than the 0.3% rise seen in December. In January manufacturing output rose by 2.2% month-to-month led by investment output which rose 8% followed by intermediate output that rose by 4%. Consumer nondurables output, however, fell very sharply by 13.1% on the month.