Economy in Brief

The GfK reading dropped to a seven-month low, a fall of 4.9 points month-to-month, the 8th largest month-to-month drop in the last 20 years.

In May 2022, the GfK index fell sharply from a level of -15.7 to -26.6. From that point, the reading migrated down to levels as low as -42.8, but it's continued with only a few exceptions to remain at readings of -20 or lower during this period. November 2024 had logged only the second reading that was stronger than -20 during this long episode at -18.4. But now the climate reading is back to -23.3. The German economy is struggling without any clear new shock to blame it on. The two shocks responsible for sending GfK confidence into such a tizzy were, of course, the arrival of COVID and the government response to that pandemic, and then Ukraine's invasion by Russia. The COVID and Russian episodes brought on a surge of global inflation. Globally, central banks are still dealing with it. Inflation continues to linger at a too-high level and the European Monetary Union, although the ECB has been reducing rates steadily and is focused on trying to stabilize the economy and as well as to be mindful of its 2% inflation target.

The global situation has resulted in the unseating of many governments around the world including in Germany. This disruption extended to a long-standing domination of politics by the LDP in Japan. These circumstances are causing many governments around the world to blame their ouster on global economic conditions rather than to engage in self-introspection necessary to reconstitute their political parties. Time will tell how the new arrangements are going to work out. In the U.K., the new government is already floundering. The Jury is out on what Germany’s new administration will do. One thing will be to interact with a new more forceful president in the United States.

The GfK confidence/climate measure provides indications for economic and income expectations as well as an assessment of the propensity to buy environment. The components of the GfK index lag by one month so we have observations for these metrics in November. In November, each of these 3 readings drops and negative readings are recorded for all of them. Income expectations fall the most sharply month-to-month. The queue-percentage or count-percentile standing of the climate index overall is in its 9.5 percentile that tells us it has been this weak or weaker 9.5% of the time historically. The economic gauge has been this week or weaker 29.7% of the time, income expectations have been this weak or weaker 28.5% of the time, and their propensity to buy has been this weak or weaker 30.8% of the time. Conditions across these metrics are consistently weak coalescing around lower 30 percentile standing, which, of course, is a poor result. There is a significantly lower standing for the overall climate gauge; that is reflective of the fact that these three gauges are not usually this weak at the same time. The combination of these three low rankings help to push the overall climate reading even lower.

We also present in this table data on confidence for Italy, France, and the United Kingdom. U.K. and French data are up to date as of November (the same as the components for the GfK index), while Italy lags two months. Italy’s most recent observation is for October. The queue- or count-percentile standings show France, and the U.K. are low and similar to the standings of the components of the GfK index. The U.K. standing is at its 32.8 percentile and the French confidence measure is at the 45th percentile. In Italy, the ISTAT index of confidence has a 77-percentile standing, leaving it much stronger in its historic range. When we look at standings, any metric below the 50% mark is below its historic median; all of these measures are showing below-median values except for Italy.

On balance, it's a very disappointing report from GfK. It is not surprising because other economic data have remained weak, particularly for Europe, and for Germany during this recent period. The GfK reading is a look-ahead reading for December. As such it's our first reading/projection for December and it isn't good news.

The U.K. Distributive Trades Sector Struggles Quarterly data from the United Kingdom distributed trades survey for the fourth quarter show mixed results from participants although data are still quite clearly weak across the board and, when at their very best, are no better than neutral.

Distributive Trades: Retailing The distributive trades survey shows that imports improved in the fourth quarter to a reading of -6 from -15 in the third quarter. The four-quarter average has been around -11 so this is an improvement relative to the average. Capital spending for the year ahead also made some improvement in retailing to a -27 reading from -35 previously; however, that's still weaker than the four-quarter average of -24. The business situation expected over the next six months; however, deteriorated to -21 from -13 and that's much worse than the four-quarter average of -7. Inflation continues to be an issue in the U.K. although it is moderating. It may be an important reason the business situation is eroding. However, selling prices in the fourth quarter are weaker than in the third quarter at a +24 reading compared to +30 in the third quarter; however, that's a lower reading than the four-quarter average of +32. Employment expectations strengthened to -18 from -25 in the third quarter and that's better than the four-quarter average of -22, indicating some ongoing improvement, the survey on employment. Expected data show that price inflation is expected to be weaker at a +15 reading in the fourth quarter compared to +30 in the third quarter- this compares to a four-quarter average of +43 so inflation progress is being made. Employment expectations, however, are weakening at a -28 reading for the fourth quarter compared to -18 in the third quarter; compared to a four-quarter average of -16. The negative expectations for employment are getting worse.

Distributive Trades: Wholesaling Turning to wholesaling, reported imports are deteriorating, the opposite result that we saw for retailing, with a +7 reading in the fourth quarter compared to a +14 reading in the third quarter; however, the +7 reading is only a tick weaker than the +8 four-quarter average for imports. Capital spending is slightly improved in the fourth quarter compared to the third quarter although slightly weaker than its four-quarter average with a -15 reading for the fourth quarter and a -12 four-quarter average. The business situation expected over the next 12 months deteriorates sharply in the fourth quarter, falling to -12 from a +20 in the third quarter; those readings compare to a four-quarter average of +10, confirming that business expectations are a problem. The selling price for wholesaling ticked up in the fourth quarter to +14 from +12 in the third quarter, but that's significantly lower than the four-quarter average of +24. Inflation progress is being made but HICP data show that inflation, while better, continues to run at a pace above trend. Employment fell off sharply in the fourth quarter; the fall was to a net reading of zero after +14 in the third quarter; those metrics compare to a +9 reading over the last four quarters. Expected prices in the fourth quarter improved significantly (slowing their gain) to +11 from +31 in the third quarter and that survey compares to a +28 over four quarters. Employment expectations in the fourth quarter also declined to +11 from +18 in the third quarter, but they continue to sit on their four-quarter average.

Summing up The rankings are presented in the table and there are but two exceptions where rankings stand above the 50th percentile. Most readings stand below a ranking at the 50th percentile, which puts them below their historic medians calculated from data back to the first quarter of 1990. Only wholesaling imports at a 51.4 percentile standing and expected employment in wholesaling at a 70 percentile standing, have standings above their 50th percentiles. However, wholesaling employment trends over the past have a 49.3 percentile standing, fairly close to neutral, but everything else in the table shows numbers that are quite significantly below the 50th percentile, frequently and most commonly, below the 30th percentile standing. These are readings that have been weaker than their fourth quarter values less than 30% of the time for the most part. Some of them are much weaker than that. The U.K. clearly is experiencing difficulty. There's barely any evidence of any rebound in this survey and only a few categories are improving somewhat in the fourth quarter compared to the third quarter. None of this is very convincing on trend. The ranking data tell us the conditions continue to be extremely weak. The trends tell us that there's very little improvement and still much deterioration going on. It's a grim report for distributive trades survey from the United Kingdom for the fourth quarter. Wholesaling rankings stand broadly higher than those for retailing but without much meaning since both are so weak.