Economy in Brief

UK industry turns a corner for the worse… The report on the United Kingdom industrial sector survey in December from the CBI is a crushing blow to anyone looking for recovery to take hold in the United Kingdom led by the industrial sector. The report shows significant, substantial, and even enormous deterioration in December in metrics involving total orders export orders and expected volume over the next three months. There is no silver lining here and, in fact, to make matters worse in the face of all of this weakness and expected weakness… average prices expected over the next three months move up sharply in December compared to what had been expected in November.

Total orders declined to reach a reading of -40 in December from -19 in November. Export orders in December slipped to -37 after logging -27 in November. The only thing close to a silver lining here is that the stocks of finished goods have a reading of 20 slightly lower than 21 in November indicating that inventories are not piling up at the moment and adding to and more horrific inventory cycle. Nonetheless diffusion readings on stocks of ‘20’ and ‘21’ are quite high.

Looking ahead In the looking ahead category, we have output volume for the next three-months fall to a reading of minus 31 from plus 9 in November. This is a really sharp slowdown that leaves the output volume series in the 2.3 percentile of its queue of data back to 1992, an extremely low reading. Average prices for the next three-months at the same time take on a diffusion value of 23, up from 11 in November after having got to zero in October. The reading of plus 23 in December has an 87-percentile standing, an extremely high level indicating that not only is growth in trouble but that inflation, or at least expected inflation, is back.

A drop in expected output of historic proportions The drop in expected output three-months ahead is a 40-point shift month-to-month (to -31 from +9) on data back to 1990. This is the second worst shift in the monthly reading in this survey, surpassed only during Covid in April of 2020. That is especially shocking since, at that time, there was a specific event to account for the shock-shift in expectations, unlike now. Now, the UK faces a period of domestic political stability, a world with global political shifts in progress in other countries – a changing of the geopolitical guard - and economic struggling as well as ongoing war in Ukraine and a worsening of instability in the Middle East. But this CPI reading is a horrific decline to impact one month’s reading. Meanwhile, most of those background events are not new and have been in progress. It appears that some watershed has been passed that businesses can no longer ignore.

Dilemma at the BOE Of course, the Bank of England has flipped the switch and has been cutting interest rates. And at its last meeting while it cut rates there was an accompanying message that it might be a while before the bank cut rates again. And now the bank is being put in a real dilemma because the state of the economy seems to call for rate reductions while the inflation background seems to call for rate increases. Welcome to the wild whacky world of central banking!

Weakness across the board The percentile standings of the various categories show total orders at a 6.5-percentile standing, extremely weak with export orders at a 14-percentile standing, stocks -while not changing much month-to-month - have an 89.6-percentile standing. As noted, the output volume for the next three-months has a 2.3-percentile standing with prices expected over the next three months at an 87-percentile standing. There's nothing here that's good news and nothing that is going to make policy making in the United Kingdom any easier. It's certainly going to make life for the new government much more difficult and policy at the Bank of England much more contentious. It's definitely not a good way to end the old year and to usher in a new one but reality is what it is and in the United Kingdom the reality has just turned quite sour.

The Zew reading from the survey of financial experts in Germany produces a view of a weaker economic situation in the Euro-Area and in Germany but with some improvement in the United States. The degree of improvement is small for the US and the deterioration is small for Germany. The index ranking falls to -93.1 from -91.4 for Germany, however, for the Euro-Area the setback is considerably larger to a reading of -55.0 from a reading of -43.8 in November. As a result of these shifts on the month, the queue percentile standing for the Euro-Area has slipped to 27.9%, Germany remains extremely weak at a 2.7 percentile reading, while the US reading stands much stronger, at 48.2% just below its historic median which occurs at a ranking of 50%.

Expectation assessments for Germany and the US show opposite movements with Germany moving up to 15.7 from 7.4 in November while the US slips back to 8.9 in December from 13.3 in November. The expectations readings are not as depressed on a ranking basis as the current statistics are, with Germany moving up to a 44.4-percentile standing and the US slipping back to a 58.1-percentile standing. The US ranking is still above its historic median reading. Improvement for Germany brings the December reading up close to its six-month average and above its three-month average.

Inflation expectations continue to fall in the Euro-Area and in Germany. In the Euro-Area the fall is relatively sharp to a reading of -23.9 from -13.4 in November; for Germany it's a fall to -25.7 in December from -14.7 in November. The US sees an increase in inflation expectation to plus 12.6 in December from plus 2.7 in November, giving it two straight months of net positive readings on inflation expectations. The queue standings for the period put Euro-Area expectations at a 19-percentile standing, with Germany close by at an 18.1 percentile standing, compared to the US at a 29.6 percentile standing. All of these are below their historic medians, but the US clearly is showing more of a tendency toward inflation in the view of the Zew financial experts.

Short term interest rate expectations have weakened in the Euro-Area as they have moved up in the United States, which is what you would expect with the shifts in inflation expectations that have been recorded by the Zew experts. The Euro-Area has a ranking of current short term rate expectations at 1.1%, an extremely low ranking, while in the US has short term rate expectations only at 6%, still extremely low.

Long term rate expectations for Germany have strengthened to a diffusion reading of -3.2 from a reading of -13.3 and for the US they've strengthened more sharply moving into positive territory at +11.4 up from -0.6 in November. The long-term rate expectations for Germany have a 10.7-percentile standing, while for the US the standing is approximately double at 20.5-percentile. Both of these, of course, are still quite low and well below their historic medians that would occur at a ranking of 50%.

Stock market expectations produce positive diffusion readings across the board but a weakening ranking for the Euro-Area, for Germany, and for the US. While the US has the strongest net diffusion reading and the strongest ranking, it also has the largest step back from November to December as US stock market expectations fall to 31.9 from 53.5. In the case of Germany, they fall to 13.3 from 17.8; for the Euro-Area stock market expectations dropped to 16.5 from 21.9. The Euro-Area ranks at 10.9 percentile, with Germany at the 8.2-percentile level, they compare badly to the US at a ranking of 56.4 percentile, above its historic median.

The Euro-Area reading is continuing to be quite weak, while U.S. data have been stronger, and we see this reflected in exchange rate movements with the dollar firming. However, economies don't simply move in a linear fashion and while US retail sales recorded on Tuesday, we're quite a bit stronger than expected US industrial production for November unexpectedly stepped back, keeping the US manufacturing sector on the same week footing that we continue to see reported globally. That weakness was well demonstrated in the S&P manufacturing PMIs as reported yesterday. The global economy continues to struggle and to be supported by its services sector.

The S&P flash PMI readings show strengthening for the composites across the board except for Australia for the early reporters presented in this table in December. However, it's very much a performance that rests on the services sector that is stronger in each of the reporting countries except Australia, while manufacturing is weaker in all reporting countries in December, except in Japan.

Sequential weakness over the last three-months Sequential data show a clear weakening over three-months compared to six-months for all the entries in the table except for the US composite and the US services sector. Over six months conditions are much more mixed with ten of the 21 readings showing a stronger result over six-months compared to 12-months. Over 12-months compared to 12-months ago there was a broad strengthening with only four reports of weaker activity on that basis: for manufacturing in Germany, manufacturing in Australia, services in the United Kingdom, and services in the United States. All other entries show strengthening over 12-months compared to 12-months ago (based on averages).

Sector performance-rankings The sector standing is indicated by the queue rankings that position the December entries in a string of data over five years. They show only six of the 21 rankings above 50% indicating that only six of them lie above their medians for this 5-year period. Two composite rankings are above their medians: the US with the ranking in the 78th percentile and Japan, with its ranking in its 60th percentile. Those are driven by strong service sector rankings, in the case of Japan services that have a 56.7 percentile standing, in the case of the US services at a 72.8 percentile standing. German services have an above median standing at 51.7% while for the European Monetary Union the service sector has a 55.0 percentile standing. But in the case of the Monetary Union with a 20-percentile standing for manufacturing the composite only reaches to 40% (Germany does even worse).

Covid post-Covid – a sad tale for growth This has been a five year period of exceptional weakness with the composite rankings in all but two countries below their five-year medians The United States and Japan weaker than they were five years ago in January of 2020 just before COVID began, manufacturing sectors are weaker than in January 2020 everywhere except in Japan; only the US and Japan have service sectors that show gains compared to January 2020. Manufacturing has been exceptionally weak during this period. This group of countries shows a current average manufacturing standing in its 22nd percentile, compared to services with an average standing across countries in the table at its 48.7 percentile, and the composite reading currently at an average standing in its 41.9 percentile.

Summing up Globally conditions are weak and in December the readings continued to be uneven, and this is at the end of a three-month period when conditions show broad weakening compared to six-months. This is not exactly the way central banks had hoped to end the year. Apparently 2024 will end with monetary policy still broadly in an easing cycle but perhaps, these are becoming easing cycles that are entering a less vigorous stage with inflation that has come down from its peaks but has showed signs of being stubborn above the targets that central banks have set for inflation. And it's a period in which economic growth remains weak and it's not showing signs of acceleration. However, is it also -strangely – a time with some good news, when labor markets show full or close to full employment! Ominously the Baltic dry index, which is an index of trade volume globally, shows the trade volume momentum has been slipping in recent weeks - another disappointing sign as the year draws to an end.