Economy in Brief

Inflation in the United Kingdom moved higher in September with the month-on-month CPIH headline rising by 0.5% after rising by 0.4% in August and falling by 0.1% in July. The core CPI, which is a measure excluding energy, food, alcohol beverages, and tobacco, rose by 0.4% in September after being flat in August and logging a 0.5% gain in July. The monthly trends of these inflation metrics are not particularly impressive; however, longer trends are more reassuring.

Headline inflation rises by 6.4% over 12 months, at a 4.4% pace over six months and at a 3.4% annual rate over three months. For the core CPI, the 12-month gain is 5.9%, moving higher to 6% over six months and then decelerating to 3.6% at an annual rate over three months. The 5.9% increase in the core-CPIH year-over-year is the same as it was in August. This pair of monthly observations shows the slowest increase in year-over-year inflation since March of this year. Similarly, the headline has become more disciplined even as the year/year pace rose to 6.4% from 6.3% in August. But this is the same as the 6.4% in July and prior to that inflation was running at a pace of greater than 7%, greater than 8%, and greater than 9%! Apart from this recent monthly stretch, inflation was last below 7% in March 2022. Even with the slight backtracking in the headline rate and the flat year/year result in the core, the trends for inflation progress in the U.K. remain in place.

Diffusion that looks at the propensity of inflation to pick up on a period-to-period basis shows mild readings for month-to-month data from July through September. September diffusion is at 54.5%, it was as low as 36.4% in August, and it was at 54.5% in July as well. The neutral reading for inflation is 50%. And the reading of 50% inflation is accelerating in as many categories as is decelerating period-to-period. A reading slightly above 50% indicates a slight tendency for inflation to accelerate across categories. These diffusion results are broadly in the zone of neutrality; in the case of August, there is a clear signal that inflation decelerated broadly.

Applied to the sequential data where we look at three-month inflation compared to six-month inflation, and six-month inflation compared to 12-month inflation, and 12-month inflation compared to a-year-ago inflation, we find diffusion measures at 36.4% over three months, at 45.5% over six months, and at 36.4% over 12 months. All of which indicate that inflation is slowing down period-to-period across categories. This means that inflation across the various CPI categories is behaving and giving the same signals as headline inflation, which is not always the case. In this case, the confluence of inflation trends, assessed in different ways, is reassuring.

The ZEW survey in October is little changed from the views offered in recent months. The macroeconomic assessment for October shows a relatively sharp deterioration in the euro area, a minor monthly deterioration in Germany, and a small amount of progress in the United States, according to the surveyed experts. Averaged three-month, six-month and 12-month data show the euro area largely unchanged in its negative assessment. Germany is assessed as progressively worse while the U.S. progresses to minor improvement in six-months compared to 12-months and in three-months compared to six-months. Assessed based on their queue data standing, the U.S. has the stronger economic situation at a 42-percentile standing, the euro area has a 30-percentile standing, while Germany has a much weaker 13-percentile standing. All of these are below the 50% mark that registers the median value for each individual sovereign area.

Macro-expectations Macroeconomic expectations for the U.S. and Germany find negative expectations in October for both but an improvement in Germany against a deterioration in the United States; both in magnitude of about 10 points (plus for one minus for the other). The averages from 12-months to six-months to three-months show Germany deteriorating to slightly weaker conditions over three and six months. The U.S. gives erratic but consistently negative and slightly more deeply negative readings than in Germany at least based on average diffusion readings. However, the ranking of the October German figure is only slightly higher at 25.8% than the ranking of the U.S. figure at 24.4%. Both reside at or near the bottom 25-percentile in their historic queue of data.

Inflation expectations Inflation expectations fell in the euro area, Germany, and the United States at a time that inflation is excessive in all regions relative to target, indicating that inflation reduction progress is still in gear and progressing more rapidly than it was a month ago. However, on averaged 12-months to 6-months to 3-months data, the metrics all have taken on slightly stronger readings indicating that in the big picture inflation reduction is occurring but that the expected pace of progress may be slowing down.

Monetary policy As for monetary policy, short-term interest rate expectations in the U.S. have gone flat at zero while in the EMU region, there is a sharp reduction in the average diffusion value indicating that some rate hikes are still expected but fewer than before. Both the U.S. and euro area 12-month to 6-month to 3-month averages show steady and large reductions in value, sequentially.

Long-term rate expectations Interestingly, long-term rate expectations turned negative in Germany compared to earlier months while, in the U.S., the reading retained its ongoing negative diffusion value. Recently bond yields have moved higher, contrary to these survey expectations. The progression for averages from 12-months to six-months to three-months shows a steady significant reduction in long-term rate expectations transitioning from positive readings over 12 months to negative readings over three months in both the U.S. and Germany.

Stock market expectations Stock market expectations largely weakened. In the case of Germany, the weakening was slight. The U.S. and the euro area showed sharper reductions in their diffusion indexes that nonetheless remained positive in October. Sequential values show little evidence of changed momentum in any direction.

The European Monetary Union has logged its 4th trade surplus in a row and the 5th surplus in the last six months. This follows a long stretch of deficits that arose in the early post-COVID period.

The surplus: The surplus in August has moved up to €11.9 billion from €3.5 billion in July. The 12-month average is still at a deficit of €7.8 billion. The current account surplus/deficit situation is chronically a balancing act between a manufacturing surplus and the deficit logged on the nonmanufacturing account. In August, the manufacturing trade balance among monetary union members moved up to €34.9 billion from €29.9 billion in July. That compares to a deficit of €23 billion in August versus €26.4 billion in July for the nonmanufacturing trade balance. The larger surplus in manufacturing, of course, causes the overall trade balance to be positive.

Month-to-month: Exports in the monetary union rose by 1.6% in August after falling by 1.7% month-to-month in July; imports fell by 2% in August after rising by 0.1% in July.

Sequential trends: Sequentially export growth in the monetary union is still negative but at more or less steady negative paces running at -3.8% over 12 months, at a -4% pace over six months and at a -3.6% pace over three months. Imports also show consistent and essentially trendless negative growth rates, but they are much weaker growth rates (larger negative growth rates) that coalesced around declines of 20% at an annual rate or a little bit more.

Sequential manufacturing trends: Focusing on manufacturing doesn't change the trends very much. Manufacturing exports over 12 months to six months to three months show all-negative growth rates in a range of -1.8% to -4.0% annualized. Similarly, manufacturing imports show consistent and much larger negative growth rates of -12.8% over 12 months, of -9.7% annualized over six months and of -20.2% at an annual rate over three months. Germany's trade performance is not being achieved on the back of strong exports; rather it's been done on the back of continuing weakness in exports with even weaker conditions in imports.

Sequential nonmanufacturing trends: However, trade performance is a result of manufacturing and nonmanufacturing trends. Nonmanufacturing trends for exports also show consistent negative results for slightly higher negative growth rates in the range between -4.3% and -11.7% over three months, six months and 12 months- again without a clear pattern. For imports, the nonmanufacturing trends show still-gigantic negative numbers, but in this case, they are tending towards slightly less weakness with -41.9% growth over 12 months, -25.3% growth annualized over six months, and -20.9% over 3 months annualized. Comparing nonmanufacturing trends, we basically get the same result as for trade in manufactures. Nonmanufactured exports are weak, but nonmanufactured imports are even weaker and that also tends to drive the trade picture more toward surplus. Clearly, it's demand weakness in the monetary union plus price weakness on the commodity price front that are helping to cause the trade picture to improve in the monetary union.

Germany: The German trade is slightly different from the EMU trend with exports logging positive growth on all these horizons, although showing weakening growth with a 7.6% gain over 12 months, a 1.7% annual rate gain over six months, and only a 0.8% annual rate gain over three months. Compared to the European Monetary Union trends, Germany also has imports weaker than exports, with imports rising 3.8% over 12 months, falling at a 19.4% annual rate over six months and then falling at a 13.1% annual rate over three months.

France: France shows some similarity to the German situation with the growing exports although in the case of France exports are accelerating from 4.3% over 12 months to a pace of 5.3% annualized over six months, to an 11.9% annual rate over three months. French imports are also declining on all these horizons although with a much weaker negative growth rate over three months as French import growth transitions from -9.2% over 12 months to -19.9% annualized over six months to an annual rate of just -2% over three months.

United Kingdom: The U.K. that is completely independent and no longer a part of the European Union shows decaying trends for exports that grow by 24.2% over 12 months, decline at a 14.6% annual rate over six months and then decline at a 54.9% annual rate over three months. U.K. imports fall by 1.2% over 12 months, then fall at a 10.1% annual rate over six months, but then only fall at a 7.1% annual rate over three months. The weakness in exports over three months completely dominate the weakness in imports for the United Kingdom over that period.

Other Selected European exports: Export data for Finland, Portugal, and Belgium show very mixed trends: all of them share declining export trends over 12 months, but then over six months Finland posts an export gain of 1.3% while exports from Belgium and Portugal continue to show substantial negative growth rates over six months. Over three months Finland’s exports declined at a 27.8% annual rate as Portugal and Belgium each saw exports increasing over three months by 7.4% in Portugal and at a 5.3% annualized rate for Belgium.