Economy in Brief

UK inflation jumped more than expected in October with the CPI-H rising 0.5% after being flat in September. The CPI-H core measure excluding energy, food, alcohol, & tobacco rose by 0.4% month-to-month after rising 0.1% in September.

Even though this is the UK reporting a bad number after a good number, its good number in September had followed another bad number in August so on balance the trend for the UK is remaining higher than the result that policy seeks.

Inflation’s trend - Sequentially headline CPI-H inflation is up by 3.2% over 12 months it's up at a 3.2% pace over six-months and it's up at a 3.6% annual rate over three-months. Those numbers compare to a 2% target for inflation in the UK; the core for the CPI-H that is described above, rises 4.1% over 12-months, rises at a 3.9% annual rate over six-months, and gains 3.7% at an annual rate over three-months. This rate shows some minor disinflation and progress but at a pace that's still terribly high and with the core rate higher than the headline rate on each of these sequential periods. That's disappointing because the core rate tends to be more stuck and it's harder to move.

Inflation’s breadth - Diffusion measures the breadth of inflation acceleration. That metric is at 54.5% in October, September, and in August. It tells us that the month-to-month inflation changes have had just a little bit more acceleration than deceleration over these last three months, a period when inflation has been running too hot. Sequentially, if we look at diffusion over 12 months, that diffusion is low with the reading of 18.2%. Over 12 months inflation is accelerating in only about 18% of the categories! But, of course, a year ago headline inflation was 4.7% and core inflation was 5.7% so it's not surprising that there's a broad deceleration from those sorts of numbers. Over six-months we find diffusion is a lot higher but the reading on diffusion is still quite low, showing a tendency for inflation to fall, since the diffusion index is only at 36.4%. Diffusion shows a lot more step down in inflation from six-months to 12-months than what we see in the actual inflation numbers measured either by the headline or the core CPI-H. The inflation rate over three-months, however, shows that diffusion marks inflation as accelerating again. Three-month diffusion is at 63.6% indicating that inflation is accelerating in nearly two-thirds of the categories over three-months compared to six-months. This is certainly not acceptable with the three-month inflation rate running at 3.6% and with the core slightly hotter.

Unemployment is low - During this period, the economy has continued to generate low unemployment rates. The unemployment rate in August is 4.3%. That compares to a 12-month-ago unemployment rate of 4.1% twenty-four months ago it was at 3.8%. There has been only a small rise in the unemployment rate from some extremely low numbers. The claimant rate of unemployment shows a little more up-creep at 4.7% in October that compares to 4.6% in August; it compares to a rate 6 months ago at 4.1%. The claimant rate is showing slightly more lift but still a relatively moderate rate of unemployment.

Summing up - These conditions are going to continue to make policy-making difficult at the Bank of England. Inflation is running hot, and it looks like it's stuck. The economy is performing reasonably well, judging from the state of the labor market. But there's also some evidence of economic weakness, certainly broader macroeconomic data have shown more weakness than just the unemployment rate. Policy in the UK is going to continue to face challenges as 2024 draws to a close.

Foreign orders have been trying to pull total German orders higher for some time now. In September both foreign and domestic orders show solid increases with overall orders rising 4.2% month-to-month foreign orders rising 4.4% and domestic orders rising 3.6%. Sequentially, however, it's foreign orders that really stepped to the fore. The overall order pattern shows acceleration with growth going from 1% over 12-months, to a 9.8% annual rate over six-months, and rising further to a 10.2% annual rate over three-months. However, this result is substantially driven by foreign orders which rise by 0.8% over 12-months, advance at a 10.2% annual rate over six-months, and then spurt at a 35.1% annual rate over three-months. The impact on overall orders is blunted by domestic orders that began to seriously lag over three-months. The 12-month growth of domestic orders is 1.5%, over 6-months they perk up to a 9% annual rate, in line with foreign orders. But over three-months domestic orders fall at nearly an 18% annual rate, a stunning departure from the acceleration in foreign orders.

Real Sales - Sales do not show the same kind of turn around. For manufacturing and mining real sales fall by 4.2% over 12-months, contract at 5.7% annual rate over six-months, and contract at 3.3% annual rate over three-months. The pattern for manufacturing is similar. Individual industries show little guidance as far as illuminating acceleration or deceleration, since the sector changes remain chaotic. Not only do the sectors failed to show clear trend developments, they don't even grow or shrink consistently over 12-months, six-months, and three-months. The sales picture in Germany is quite confusing.

European Industrial Confidence - Measures of industrial confidence show consistent negative values in September for Germany, France, Italy, and Spain. All of them show deterioration compared to August except Spain where there's an improvement to -0.9 from -3.6 in August. Spain shows improvement over four months in a row on this score. Looking at the sequential values for industrial confidence, the German average is declining consistently, from 12-months, to six-months, to three-months; the same trend is implied for Italy. France shows little-change but logs consistent negative readings while Spain shows negative readings of diminishing intensity as the sequence that moves toward improvement.

QTD - Quarter-to-date data are now for the just completed third quarter. German orders show clear strong accelerations on this basis. Real sales across sectors show weakness and declines. Economic indicators are presented as rankings; all show below-median standings (below 50%) except Spain that shows a solid-strong 73.7 percentile standing for industrial confidence-and stands by itself in this grouping.

The EMU trade surplus rose in September to €13.5b from €10.8b in August. However, the average surplus size has been shrinking as the 12-month average is €14.9b, the 6-Mo average is €13.9b, and the 3-Mo average is €12.4bl. The September surplus has risen above its 3-month average but does not seem to be part of a trend.

The table chronicles the gradual erosion in the trade surplus on manufacturing trade from 12-mo to 6-mo to 3-mo. On the same timeline the deficits on non-manufacturing trade in EMU has become only slightly smaller partly offsetting the effect of the shrinking manufacturing surpluses on the overall trade picture.

Export trade trends for total trade as well as for Manufacturing and nonmanufacturing viewed separately show no clear trend on the 12-Mo to 6-Mo to 3-Mo timeline.

Import trends show overall acceleration that is supported by both accelerating manufacturing imports and non-manufacturing imports.

The Euro-Area trade data are for net flows in and out of the whole area with intra-regional trade netted out. The EMU area is showing an acceleration in imports that suggests a strengthening in demand. However, the area’s exports are not picking up in step. These trends are not borne out in the month-to-month changes but are fully reflected in the sequential averages.

However, it is too soon to view Europe as in recovery or out of the woods based on some strength in imports. While the sequence of import growth rates improves steadily over shorter periods, the more reliable year-on-year rate of growth for imports still register declines for overall imports driven by more extreme weakness in non-manufacturing imports.

While exports are not trending to stronger growth, at least export flows appear to be stable with positive growth rates for the most part. Manufacturing exports gain 1.2% over 12-months and rise at a 0.8% annual rate over three-months. The nominal growth is slow and is indicating only slow decay in real terms.

Country level data are, of course, of a very different quality, since these data are by the reporting country and will include as ‘exports’ goods sent anywhere outside that country’s borders which will include exports within the Euro-Area itself. On this basis German exports and imports are declining and decelerating. France shows exports steadily accelerating with imports not trending but clearly declining on all horizons. The UK, a non-EMU/NonEU country, shows exports reviving from a steep negative 12-month growth rate to show strong gains over three months. Meanwhile, UK imports also recover from steep year-on-year declines to post a more neutral result over three-months. On the export side alone Finland shows exports growing on all horizons while Portugal and Belgium show export growth turning negative over shorter horizons.

On balance, EMU and European trends are mixed. There is some hint of stabilization on the import side, but that trend development is new and not echoed by year-over-year strength. Germany and France, the two largest EMU economies, both show consistently weak imports. There is precious little good news in the September trade report from EMU.