Economy in Brief

These are not your father’s or grandfather’s central banks. Oh, the names are the same (well, except for the ECB which didn’t exist ‘a generation’ ago). The behavior would be unrecognizable to those who knew Fed policy under Paul Volcker/Alan Greenspan or Bundesbank policy under Karl Otto Poehl and his legacy mates.

What has happened? Is it inflation targeting or is it something more?

INFLATION TARGETING IS FAILING...Instead of working as Ben Bernanke said it would, getting markets to see what central banks want and then acting to make that happen reinforcing the target goal, Central banks have instead used targeting as crutch to promise the target and deliver something else. This dissonance will eventually weigh on central bank credibility and undermine the process that Bernanke said would help banks to achieve their target.

ECB HICP inflation is not that far from its target, but momentum is in the wrong direction and inflation has been over target since early 2021 (38 consecutive months). Core inflation in the EMU is far too high (data lag by one month) and core inflation is accelerating- again moving in the wrong direction.

Some weakness, yes, but is it all that serious? The ECB speaks of a concern about weaker growth, but few of the early reporting EMU members display GDP declines in Q2. Among the 14 EMU members, I have data for only Austria, Germany and Ireland log declines in GDP Q/Q as of 2024-Q2. Austria, Finland, and Ireland log declines in GDP on four-quarter changes – that’s a more serious issue. Among the five EMU member countries that report composite PMI data to S&P, only Germany has a diffusion reading below 50 (indicating contraction). The EMU reading is 51.1 and it improved in August. EMU composite data ranked over the last 4 ½ years has a 51-queue percentile standing putting just above its median for the period (median occurs at 50). France, Italy, and Spain all have queue-standings above their respective 50th percentiles. Ireland and Germany are exceptions; Germany’s queue-standing is weak at the 28.6 percentile. The EMU’s largest economy has been weaker in terms of year-on-year growth only about 25% of the time.

U.K. industrial production contributed to a negative monthly GDP surprise today as IP and construction were weak in July offset in the GDP framework by services whose growth kept GDP from falling in the month.

U.K. manufacturing IP fell by 1% in July after rising by 1.1% in June and by 0.4% in May. Sequentially this means U.K. IP is accelerating since its year-on-year change is -1.3%, over six months it is fairly, and over three months the annual rate of change is +2%. That’s not exactly rollicking growth, but it does count as accelerating even if IP is falling in July. However, short of some sharp reversal, the current pattern of output does not bode well for the whole of Q3 (see Q3 to Date).

In July, U.K. industrial production fell by 1.6% for consumer durable goods output, fell by 1.8% for capital goods output, and fell by 0.7% for intermediate goods. The output of consumer nondurable goods advanced by 0.3%.

Manufacturing sector sequential growth rates from 12-months to 6-months, to 3-months, show consumer durable goods output is imploding, declining at an accelerating rate over this horizon. Consumer nondurable goods and intermediate goods both are showing acceleration from12-months, to 6-months, to 3-months. Capiral goods are in no-man’s-land. Output is weak, falling in each period, but it is not a drop that steadily accelerates although, annualized, the decline over three months is faster that the annual decline over 12 months.

In contrast, industry details are far from uniform and often extremely different. Textile & leather output, motor vehicle & trailer output, and mining & quarrying all show a strong tendency to decline over most horizons. Food, beverages & tobacco, and utilities are the two sectors that are exceptions to the weakness, and both show persisting increases with the food group demonstrating output acceleration.

The quarter-to-date calculation (QTD) logs a decline for the headline (MFG output) in July, one month into the new quarter. However, consumer nondurables and materials provide some positive momentum in the unfolding quarter. Industries show increases QTD for the food group and for mining & quarrying, as utilities take a pass on expansion for both July and the QTD as well.

Riding a very weak trend U.K. net output results since COVID struck show manufacturing output net lower – over a period of four and one-half years for all of manufacturing, and all sectors except consumer nondurables. They are up by 13% over this period. That means consumer nondurables have had a steady run, expanding on average by 2.7% year-by-year. Consumer durables output has been flat, intermediate goods output has declined on average a bit faster than nondurables output has expanded. Capital goods output has declined by nearly a half percentage point per year. Overall manufacturing output has been contracting at a pace of nearly 1% per year over the last four- and one-half years.

Meanwhile sector results are widely different. The food group, textiles & leather, and the motor vehicle group have increased output over the period at a double-digit pace ranging from a full period gain of 25% for the textile group to 12.2% for the motor vehicle group. Output in the textile group has averaged over 5% per year, with the motor vehicle group averaging a compounded pace of 2.5%. Meanwhile both the mining group and utilities fell for a net drop of 41%, a compounded drop of over 10% per year.

These are shocking disparities across industries.

The unexpected weakness in early Q3 U.K. GDP could convince the Bank of England that an earlier-than-expected follow-up rate cut is warranted as U.K. inflation is running at 2.2% year-on-year against a core increase at a more stubborn 3.3%. But if the economy is really weakening, looking for more price weakness head would make sense. The next BOE meeting will tell us what the BOE fears most.