Economy in Brief

Climate improved for industry in February. Manufacturing production expectations nonetheless weakened in February falling to -8.1 from -7.0 in January.

The recent trend for production is a net negative reading in February but it is improved from its weaker reading in January. The own-industry likely trend is assessed as stronger in February, that metric is the respondents’ assessment for the performance of his own industry, but that one too is weaker in February than in January. Both are below their historic means.

Orders and demand are a net negative in February, that reading is still above its historic mean. Orders and demand in February are slightly stronger than in January. Foreign orders improved in February and are well above their historic average.

The own prices and manufacturing prices overall weakened in February. Both are substantially weaker than a year ago, as well as below historic means.

Evaluated over the sample period back to 2001 all entries in the table are weak, below their historic medians, (a ranking of 50); foreign orders are the exception, they have a high 72nd percentile standing.

Foreign demand is an important factor supporting the French economy. Domestically the economy is struggling and politically dealing with farm protests. European conditions remain touch and go with the war on its door-step and new pressures to generate support for Ukraine while the US sorts out where it will stand in the middle of a political impasse.

The recent trends and expectations for production have weak standing and momentum. The good news is that inflation has weak momentum and a low standing, too. It is being driven back. The ECB is determined to reduce it further. A recent ECB communication has deemed the greater risk to be the risk of turning to ease too soon. Like in the US at the 11th hour central bankers in Europe may finally be waking up to the idea that reducing inflation from extremely elevated levels can be done but getting it all the way back down to target is more difficult and will require a more concerted effort. For a while it appeared that central bankers would be willing to cruise with inflation in an uncomfortable zone still above target. Now maybe they are deciding that they really need to get to their target values sooner rather than later. However, the state of the French economy is a reminder as to why this is difficult. The French economy is weak and in recession. It wants interest rate help. Markets have been looking for rate reductions for some time. But central banks had been so reluctant to hike rates further when inflation peaked, that they are left with inflation progress to proceed slowly, and this could also mean lingering high rates to go the final mile on inflation progress. This is not what markets want now. But it is a reminder that policy choices that seem to avoid the hard policy options, often wind up paying the piper in a different way that may also turn out to be painful.

UK industrial orders (CBI Survey) jumped to -20 in February from -30 in January. The jump put orders back at their 12-month average (-21). Orders had been slipping steadily with averages over 12-months at -21 over 6-months at -25 and 3-Mo at -24 (or -29 as of one month ago). This month’s rebound not only boosts the 3-Mo average reading, but it takes the current month sharply higher breaking the cycle of deterioration.

Export orders were similarly impacted with a -21 average over 12-months and -24 over six-months. That average is cut to -21 over three months in February but last month the 3-month average was a much weaker -27. This month’s surge in export orders has turned around the deterioration for export orders as well.

Still, total orders only rank in their 35th percentile among order data back to 1992. Export orders are relatively stronger in February at a 55.6 percentile standing, above their historic median on data back to 1992. That is somewhat surprising given the widespread weakness in Europe. Part of the reason is that about 12% of UK exports go to the US where growth is performing much better. Still, the UK’s top 25 export markets account for 54% of UK exports that go to Europe.

Stocks of finished goods on hand weaken on the month falling to +11 from +18 in January and are now not much different from their average over 3-months, 6-months, and 12-months.

The outlook for output volume over the next 3-months slipped from +7 in January to +4 in February but the +4 reading, while a step back, is consistent with the past averages. Output expectations are in their lower third historic ranking at a 33.5 percentile standing, weaker than export orders on a standing basis but in line with total orders.

Pricing is a surprise...prices were last higher than this in July of last year. Prices had slipped to a reading of +7 in December and +9 in January but have now jumped in February to +17. This compares to a 12-Month average of 15, and three-month and six-month averages at +11. The UK has been showing inflation progress that has been substantial and ongoing in terms of the Consumer index followed and targeted by the Bank of England. The CBI survey reading suggests there has been a sharp reversal for industrial prices in February. Globally goods prices have been weak along with the manufacturing sector. But now CBI industrial prices’ standing has been boosted to their 77th percentile, a reading that is quite firm and bordering on "strong".

The UK survey is a mixed report in February largely because of the inflation reading. Orders show some welcome rise is in progress. Expected output backed-off some of the recent acceleration but remains around recent average levels that show weak expansion. However, prices are sharply higher. With the UK registering recession now and the Bank of England focused on getting control of inflation, this pop in the CBI inflation survey metric is unwelcome news.

Dutch confidence in February improved to -27 from -28, a ‘small-potatoes’ gain mired in still-deeply net negative readings. The climate reading did worse, falling to -41 in February from -39 in January. But the willingness to buy improved to -17 from -20.

So, what do these index numbers really mean? We can first compare them to historic readings back to 1990. On that basis the three metrics are closely bunched in terms of their ranking. The queue percentile standings that evaluate each index number compared to its own history on this same time-line back to 1990 find them all at a standing ranking from the 18th-percentile to the 22nd percentile. That’s a tight bunching and a set of readings in approximately the lower one fifth of their historic queue of values. A lower 20th percentile reading is weak.

The progression of changes over 12-months to 6-months to 3-months shows a fairly steady increase over different periods (if you were to put them on a common per-month or per 12-month change basis). This is reinforced in the chart where there seems to be a liner progression higher that is relatively stable.

This means the confidence metrics are improving and doing so steadily but also quite slowly.

The table also provides change data back to just before Covid ran loose. The changes show all three metrics net lower on balance from their respective readings on January 2020. The climate variable has worsened the most followed by confidence overall with the willingness to buy metric seeing the smallest short-fall of the bunch. When it comes to shopping never underestimate the consumer. Shopping is a birthright, a palliative when things go wrong, it is a habit hard to stop even when the consumer has no money. As long as there is credit, there is shopping. Amen. No wonder willingness to buy is the least affected metric here, since Covid.

The Dutch economy is still struggling. Industrial production in manufacturing, like confidence, is trimming its year-on year negatives and is improving- but still declining on balance.

The Dutch manufacturing PMI survey moved up sharply in January but still did not quite climb all the way back to the neutral reading of 50.

Retail spending is also falling on balance over 12-months, but again, those 12-month declines have been diminishing as time has passed.

The evidence on the Dutch economy is that there is some progress being made but it is razor thin and slow. Of course, the outlook is brightened by the diminishing inflation rate in EMU and the added flexibility that will give the ECB in making policy looking ahead. Still, current conditions are negative on balance but still roughly stable while undergoing a snail’s pace repair. A call for hedged optimism is appropriate.