Economy in Brief: 2022

The IFO business index climate readings all improved in February; the aggregates improved for current conditions and expectations as well. In fact, the lone monthly set back was to expectations in the construction sector.

Climate readings stand above their pre-Covid (January 2020) level overall for manufacturing and in wholesaling. It is hard to see where the rebound has come from since it is not in any obvious way virus-related. In Germany, the infections rates continued higher through January, peaking in the second week of February and coming down slowly. The death rate curve, which is known to lag., reached a local low point in late-January and early-February but has since risen slightly. So the German revitalization either represents some autonomous increase in activity or it reflects less fear of the virus by the German population. The services reading for Germany in climate, current conditions and expectations all stepped up on the month, but also rising sharply was the Markit reading on the services sector. This is the sector that tends to respond the most to changes in the virus and we can expect that it also will be the litmus test for economic responses drive by changes in attitudes toward the virus.

However, retailing, while improving, is also a lagging sector in the IFO framework that needs to improve to play catch-up. This limits the conclusion that the changing attitude on the virus may be driving these responses. Retailing climate did gain substantially month-to-month, but current conditions only made a modest rise (one tenth of a tick higher, rising to -1.2 in February from -1.3 in January) while the expectations reading pushed strongly higher rising in February to -5.5 from -16.9.

There are two concepts at work here. One is the assessment currently of the change month-to-month. The other is the historic standing of activity levels in the various sectors. Overall, the standings show climate at a solid 78.5 percentile mark while the current standing is at its 51.2 percentile and expectations are only at their 51.7 percentile. The climate reading is quite solid by itself while the current and expectations readings are only at a thin margin above their respective median values on data back to 2005. The current standings for retailing and services are below their median with readings of 42.0 for retailing and 25.4 for services- their respective historic median occur at rankings of 50.0. Thus, both of these show below-par readings. Wholesaling and construction show solid/strong readings with construction at an 87.8 percentile standing and wholesaling at a 91.2 percentile standing. Manufacturing, once the strongman of this series, has a still solid reading at its 76.1 percentile.

If you wonder where German businesses think they are going, apparently, they wonder too. Their overview ranking is only at the 51.7 percentile mark, just tad above its median (on data back to 2005). The outlook is weighed down by three standings below their medians: a 20.5 percentile standing for construction, a 34.1 percentile standing for services and a 35.6 percentile standing for wholesaling. Boosting expectations above the 50 mark that represents its median is the 58.5 percentile standing for retailing and the 68.3 percentile standing for manufacturing. The 'bad news' here is that no expectation reading is higher than its 68th percentile which suggests that there is no real pent-up optimism. There is some optimism but no significant optimism. And this, even though there are signs of the virus slowing, being less lethal, and putting fewer in the hospital.

Over one, two and three months, climate readings have improved on back across all sectors as well as for current conditions and business expectations in the aggregate. But over four, six, seven and eight months, there are sector declines as well as mixed declines for the current and expectations indexes.

U.K. retail sales rose 2% in January after falling by 3.4% in December. Still, sequential growth rates for nominal sales decelerated from a 16.5% pace over 12 months to a 4.4% pace over six months to 2.2% over three months. Spending on beverages & tobacco as well as on clothing & footwear shows decelerating growth rates.

Retail volumes also show sequential deceleration. Volume sales rise 1.9% in January after falling by 3.9% in December. The sequential pace of sales falls from a strong 9.1% annual rate over 12 months to -2.7% over six months and to -5.3% over three months.

In the quarter-to-date, nominal sales rise by 2%, but sales volumes are falling at a 3.2% annual rate.

We can also rank the year-on-year growth rates for sales; the rate ranks at a very high 98.8 percentile. For sales volumes, it ranks at the same high 98.8 percentile. That is good news, but it is undermined by the trends.

The progression for sales shows a slowdown except for registrations for passenger cars. Car purchases have surged at a 48% rate over three months. Passenger car sales are strong in the quarter and rank high in terms of their year-to-date rate of growth. But it is only a partial offset to slowing retail sales overall.

Surveys for retail sales are slightly less robust in terms of their long-term percentile standing. The CBI survey for retail sales for this time of year (a sort of seasonally adjusted view) has only a 19-percentile standing, in the lower one-fifth of its historic queue of data. Consumer confidence has a 26-percentile standing, at the border of the lower quarter of its historic queue of data. The volume of orders year-on-year does better with a queue standing at an 80.6 percentile.

The surveys show quarter-to-date declines in all the survey metrics in the table including consumer confidence. The data on sequential changes are not getting worse at a progressively worsening pace, but the changes in the survey metrics do erode over six months as well as over three months- just not faster. The six-month erosion is a reversal of gains made over 12 months and over three months. That erosion continues at nearly the same pace. Only for consumer confidence is the pace of erosion lessened over three months.

In January and December, however, there is ongoing erosion for the retail surveys and for consumer confidence.

Ireland's HICP rose by 0.4% in January, the same as its gain in February. Ireland is another piece in the puzzle that looks to discover what has caused this inflation; it is everywhere. Its domestic consumer price measure rose by 0.4% as well for the second month in a row\, but the core measure slowed to a gain of 0.2% in January after rising by 0.4% in December.

Overall inflation is trendless, but both the six-month change at 7.1% and the three-month pace at 5.8% are ahead of the year-on-year gain at 5.0%. The domestic CPI and its core have the same set of features with an acceleration over six months and slowdown over three months but with both the three-month and the six-month pace more than the 12-month pace.

However, the diffusion statistics are not worrisome. They show a breadth of inflation over 12 months (compared to 12-months ago) at 58.3. Over six months the diffusion measure that compares six-month to 12-month inflation is up to 0.66, which is a high reading for diffusion. That reading says inflation is accelerating in two-thirds of the categories. But then, over three months, which makes the comparison to the six-month pace, diffusion is only at 0.50, a dead neutral reading showing acceleration and deceleration forces are balanced.

Still, there are some trends by categories: alcohol and clothing & footwear both show steady acceleration in prices – for alcohol it's a strong move higher. Health care costs show a minor acceleration tendency, rising from a 1.1% gain over 12 months to flatten at a higher 1.5% pace over three months and six months. Education costs also step up steadily but still post the second slowest three-month gain among all categories. The lone steady deceleration in price is from the catch-all ‘other' category.

Four categories show weaker three-month gains than 12-month gains while one category shows the same pace for 12-months as for three-months. Seven three-month gains are at a pace that exceeds the 12-month pace. The headline shows a three-month gain more than the 12-month pace by 0.8%. For the domestic CPI the increment is only 0.4%, but for the core it is 0.9%- nearly one percentage point. The average gain across all components (unweighted) is 1% but the median is +0.4%. So, there is inflation in Ireland; it has accelerated somewhat broadly, but not all that strongly...yet.

On balance, Ireland does not seem to have virulent inflation problems. The 12-month acceleration compared to 12 months ago is large at +5.2% and the domestic headline echoes that number. But the domestic core rate accelerates by 2.3% year over year-ago. The headlines clearly show the impact of commodity and oil prices that are still gaining but not by as much. Core gains remain more muted, but will they continue or step up in the wake of those headlines? That's the issue.

Ireland poses the question of whether inflation is bad or was it bad? The three-month pace of 5.4% and 3.9% logged by the domestic headline and core, respectively, are well above target but do not look threatening. The momentum is not threatening either. The three-month diffusion is balanced.