Economy in Brief

Inflation in the Euro Area Inflation in the euro area was up in July, rising 0.5% month-to-month after prices fell by 0.1% in June. Core inflation notched up, increasing 0.3% in the month after rising by just 0.1% in June. Core inflation is steadily ramping up. Headline inflation ramps up but eases off over three months compared to six months.

Month-to-month inflation in July accelerated in over 84% of the categories. June was an anomaly with inflation accelerating in only 15% of the categories after accelerating in 46% of the categories in May. Sequential diffusions find inflation higher over three months than over six months in 38.5% of the categories, and in 69% of the categories over six months compared to 12 months. Inflation rates over 12 months are higher than 12 months ago also in 69% of the categories.

At 2.9% over 12 months, ECB inflation is above its targeted pace of 2%. At 2.5%, core inflation is also overshooting but not as badly. The graphic shows that inflation is overshooting in each of the four largest monetary union members. Food inflation is below 2% (0.8%), annual clothing & footwear inflation is low (0.1%), furnishing & household equipment inflation is low (0.4%), and communications inflation (1.7%) and recreation & culture inflation (1.5%) are both still within the bounds sought by the ECB. That’s five of eleven categories below 2%, running at their own individual paces. Housing & utilities costs and transportation are both logging inflation numbers far above the 2% mark; both are affected by rising energy costs. Education and hotels & restaurants are showing strong pressure for an assortment of other reasons.

The Economic Situation: This month the ZEW series from German financial experts shows improving economic situations. Two of the four featured economies improve: the euro area improves to a reading of -21.5 in August from -37.7 in July, and the German economy advances to -61.1 from -77.6. The U.S. worsens to a reading of 12.9 in August from 14.9 in July, and the Chinese assessment is nearly unchanged at -25.1 in August compared to -25.2 in July. Apart from these diffusion readings and quite different from the diffusion readings is the Chinese ranking in a top position with a 73.8 percentile standing. The euro area has a 56.6 percentile standing. The U.S. has a 41.7 percentile standing. Germany has a 30.9 percentile standing. Only China and the euro area have standings above the 50th mark, which place them above their historic medians for their respective periods.

Macroeconomic expectations: Macroeconomic expectations are provided for the country-level readings for Germany, the U.S., and China. All three countries make an improvement in August, with the largest improvement coming from Germany and the smallest improvement coming in China. The standings show that, in terms of macroeconomic expectations, Germany’s economy has a 58.8 percentile standing, the U.S. has a 48.2 percentile standing, close to its median but below it, and China has a 41.5 percentile standing.

Inflation expectations: The inflation expectations poll in August compared to July shows all countries with a drop off, including large drop-offs, in inflation concerns. Euro area expectations fall to 2.4 in August from 10.4 in July. In Germany, that expectation falls to a net diffusion reading of 1.8 from 14.9 in July. There is a sizeable drop off in China too, which logs 5.3 in August compared to 12.9 in July. The U.S. improvement is smaller at 11.8, down from 15.0 in July. While the diffusion readings are different across these countries, the percentile standings are fairly similar. The euro area, Germany, and China all have percentile standings in the range of roughly 36th to 38th percentile, while the U.S. percentile standing is lower at its 26th percentile. Despite what we are seeing in markets, the ZEW experts are undeterred in their inflation outlooks.

Expectations for short-term rates: Short-term interest rate expectations don't change in the euro area. There is some further backing off in the U.S. and substantial downshifting in China where there's a sign change to -2.1 in August from plus 8.8 in July. In August, the euro area has a nearly 80th percentile standing for its diffusion value. The U.S. has a slightly below-median 48th percentile standing, and China has a slightly above median standing at its 52nd percentile.

Long-term rates moderate: Long-term interest rate expectations show some moderation in August to pair with moderate queue standings. Germany falls to 24.2 in August from 27.7 in July, the U.S. steps back to 27.7 from 30.8 in July, and China backs down to a diffusion value of 12.3 from 17.0 in July. Germany and the U.S. have rankings around their 33rd percentile mark, while China has a ranking around its 55th percentile mark. Despite the lower diffusion reading, Chinese long-term rate expectations are high relative to historic experience in relation to the U.S. and Germany.

Upbeat on Stocks: One interesting feature is the positive outlook on stocks in August, with all four responding areas, the euro area, Germany, the U.S., and China, logging diffusion values close to 40. These are up from readings that were bunched around the 20 to 25 diffusion mark in July. Despite the clustering of the diffusion values, the queue percentile standings vary quite a lot. For China, the current reading, which is the weakest diffusion reading for stocks in the table of the four, has a 92.3 percentile standing. The U.S. has a 74.4 percentile standing, and the euro area has a 59.3 percentile standing. Germany has the lowest percentile standing, just below its median at a 49.7 percentile mark.

Japan's industrial production was revised up to show a 2.2% gain in June after falling by 0.5% in May. Industrial production in Japan is accelerating, showing a 2.5% growth rate over 12 months, a 7.9% annual rate over six months, rising to a 9.8% annual rate over three months. Manufacturing is accelerating in step with the total industry measure.

Key industries like textiles and transportation show acceleration underway or something close to it. In the case of transportation equipment, a 6.4% growth rate over 12 months rises to 14.7% over six months, although it steps back to a 12% growth rate over three months. That's still a great acceleration over its growth rate for the full 12 months, doubling that pace.

Japan's mining industry shows all negative numbers, with declines in each of the last three months and with sequential growth rates showing sharper and faster declines in output over shorter periods.

Utilities delivering gas and electric services showed a sharp decline of 4.7% in June. Sequential growth rates for this sector are negative as well but equivocally decelerating. We see a -7.1% pace over 12 months, which improves to -6.4% over 6 months, and then worsens sharply to a -14.4% annualized rate over three months.

The just-ended quarter (quarter-to-date) shows industrial production up 2.4%, with manufacturing up only 0.8%, both at annual rates. Consumer goods output is up with a sharp 5.4% annual rate in the quarter, and intermediate goods output is up by 1.2%. Investment goods output is declining at a 1.1% annual rate, and mining is falling at a 16.5% annual rate. Electricity and gas utilities show growth rates in the quarter as negative as well.

Japan has had a difficult run since COVID struck. All of the industry breakdowns in the table show declines compared to their levels of activity in January 2020, five and a half years ago. That is stunning and widespread weakness. The economy is adapting. Manufacturing is showing some encouraging acceleration over the past year despite challenges aided by yen weakness. Global conditions are still touch-and-go with such high oil prices and turbulent conditions in the Middle East.