Euro Area Growth and Inflation Weaken

GDP trends cooled across the European Monetary Union in the third quarter as updated GDP reports begin to emerge. Quarter-to-quarter growth in the monetary union fell by 0.2% in Q3 after rising 0.6% in Q2. Finland, France, Germany, Ireland, Portugal, and the Netherlands all logged declines in GDP in the third quarter. Of the ten (EMU member and nonmember) countries presented in the upper portion of the table (below), GDP growth decelerates in six of them; in addition, there is deceleration for the monetary union as a whole. The United Kingdom also shows decelerated growth in the third quarter. Pooled together, the four largest EMU economies register deceleration, the rest of the monetary union on its own decelerates, the median for the monetary union decelerates, logging a 0.5% decline in GDP in Q3 after a 1% gain in Q2- decelerations are rampant. The major exception to these trends of course is ‘across the pond’ generated in the United States where 5.2% GDP growth in Q3 trumps a 2.1% gain in Q2. Acceleration lives...but the Fed is quickly seeing deceleration in its wake, a reason to moderate its policy path. We are living in an age of kinder-gentler central banks…for better-or-worse.

GDP growth rankings are weak- The far-right hand column of the table chronicles the ranking of GDP growth on data since 1997. Among European Monetary Union members, only Portugal has a ranking that exceeds its historic median on this timeline (above its 50-percentile). The median result for the nine reporting EMU members in the table is a standing at the 24.5 percentile, right at the border for the bottom quartile of the historic queue of growth rates. Of course, this stands in marked contrast to United States where its 5.2% growth rate has a 72.7 percentile standing, a standing nearly in the top quarter of all growth rates over the same period.

Growth rates in the table are color-coded to emphasize slowdowns and speedups. The four quarterly year-over-year calculations for each country or area show a preponderance of red numbers indicating slowdown. GDP growth has been slowing down persistently just about everywhere apart from - you guessed it-the United States.

Inflation trends-BEHAVE! As inflation transits to Minnie-Me Inflation data for Europe offer good news with the month-to-month flash number implying a decline and that would make it the second month in a row of falling prices. For the monetary union, inflation that ran at a 10% rate a year ago is now posting a year-over-year gain of just 2.4%, a pace of 1.8% annualized over six months, and a pace that's dropping at a 1.5% annual rate over three months.

Inflation and prices fall in November- The trends in the monetary union are echoing the same sorts of trends we've seen in the U.S. although the slowdown in inflation appears to be a bit more severe in Europe. Data for November that are still preliminary show the HICP falling by 0.1% in Germany, by 0.3% in France, by 0.4% in Italy, and by 0.2% in Spain. The headline targeted inflation numbers for November show declines in the four largest economies.

Three excellent months- Compared these monthly changes for November to the monthly changes in October, when three countries, Germany, Italy, and Spain log month-to-month declines against France that logged the small 0.1% increase. In addition, both Germany and France logged inflation numbers for September that were unchanged from the month before. On balance, this has become quite a significant three-month period. Inflation is behaving within the monetary union as well as broadly and it's occurring in a period when GDP growth has been in a protracted slowdown. Three of the four largest economies show three-month inflation rates that are negative with Spain as the exception showing a three-month inflation rate that annualizes at only 0.3%.

Core inflation/inflation ex-energy We have core inflation for Italy and for German inflation excluding energy; both these series are encouraging although not as weak as headline inflation. In Germany, ex-energy inflation decelerates from a 4.1% pace over 12 months, to a 3% pace over six months, to 1.8% annual rate over three months. In Italy, the core inflation rate is at 3.9% over 12 months, decelerates to 2.1% over six months, but then picks up slightly to a 2.5% annual rate over three months.

The growth/inflation nexus On balance, the inflation and growth statistics for Europe conform to a conventional framework in which GDP is slowing -and even declining in some areas - helping to bring the inflation rate down at a time that the central bank has been raising rates but has not raised rates as significantly as it had in past cycles. Significantly, inflation is falling, growth is slowing, but unemployment is not (yet??) rising! Energy prices are only slightly cooperating, falling by 2.9% in November; however, still rising at a 78.8% annual rate over three months and at about a 20% annual rate over six months. Still, inflation has fallen over 12 months by 11.2%, complicating the picture and the analysis and blurring the role of energy prices in this cycle when inflation is falling.

However, the GDP contribution is clear with monetary union GDP falling in the third quarter and with six of nine reporting countries showing GDP declines as well. In the euro area, only Finland reports a year-on-year decline in GDP. But France and Germany also report increases of less than 1% year-over-year. Europe appears to be engaged in a classical Keynesian slowdown in growth and aggregate demand that's putting downward pressure on prices and inflation. The jury is still out on whether this will become a full-blown recession or not. In Germany, the Bundesbank expects another quarter of negative growth. That would satisfy the ‘rule of thumb’ standard for calling the German economy in-recession but for the monetary union we still must wait for the data and then if recession does develop the question would become, how severe it will be? Would it be a moderate recession construed as a downturn only because of this ‘rule of thumb’ characterization that some people use? Or would this be the beginning of a more protracted and difficult period for the economy? While seeing inflation decline as well encourages us to believe that any developing recession would be mild, the further problem, of course, is that interest rates are already low, and the central bank really doesn't have much scope to cut rates to help the economy by very much. And history does not look very kindly upon simple central bank balance sheet expansion or negative interest rates as tools of stimulus for the economy. So, there you have it. Ready or not, here it comes: the Future.