Economy in Brief

Manufacturing in the European Monetary Union advanced by 0.4% in April based on the performance of the median performer among the eleven countries listed in the table. That was a step up from a 0.2% decline in March and compares to a 0.6% gain in February. We have in hand S&P PMI data for the European Monetary Union in April for comparison. Month-to-month, that PMI reading was lower, as March was lower than February, although February had seen a month-to-month gain. In February, March and April, the manufacturing PMIs for the euro area continued to be below 50, that indicates output is contracting in the lexicon of PMIs.

However, the industrial production index for manufacturing is a different kind of accounting for industrial performance. It doesn't have all the elements that a PMI report, which has production, balanced with prices, supplier delivery lags, employment, and more. The overall PMI is a blend of all those things. Industrial production is simply about output and unlike the PMI gauge which looks at the breadth of change across categories among a group of individual reporting companies, the industrial production figures tote up actual output and present the result as a magnitude of change. The PMI process and the industrial production process generally produce similar signals. The PMI approach has the advantage that it can bring us data that are more up to date since diffusion data are easy to report. The industrial production approach gives us a more precise idea of what's going on in terms of the magnitude of change in the sector. Formally the PMI gauge looks at the breadth of output increasing or declining; industrial production looks at the magnitude of the change in output.

Typically, we compare the PMI gauge to the year-over-year growth rate in IP; on that basis, there is a ‘disconnect’ this month since IP falls over 12 months and manufacturing PMI is below 50 in April.

However, it's also clear that there is some progress going on in manufacturing. The month-to-month changes in growth and acceleration show improvement. Growth acceleration occurs in 63% of the categories in April using industrial production; acceleration is 46% in March and occurs across 61.5% of EMU members in February. Over the last three months, output has tended to accelerate more than to decelerate. Sequential data show output falling over 12 months, rising at a 0.8% annual rate over six months – again, based on the median- and rising at a 4.9% annual rate over three months. That's an accelerating trend. Engaging acceleration by calculating the breadth of acceleration across members reported in the table, we have 70% accelerating over three months, 38.5% accelerating over six months, and 50% accelerating over 12 months. That's not a crystal-clear trend, but it's suggestive of a manufacturing sector that is regaining its footing.

Quarter-to-date data output looks at the growth across European Monetary Union members in April compared to their first quarter average. On that basis, there is a median increase of 3.6% at an annual rate in the works. Only four of the reporters in the table show quarter-to-date declines in progress among monetary union members.

Assessing the ratio of current industrial production to January 2020 before COVID struck, there are five of eleven members that are still below that pre COVID level, underscoring the sense in which this period of growth dating back to pre-COVID has been disappointing. We're looking at a four-year period. And we're comparing the level of industrial output over that span and finding that nearly half of the members have output that's lower than it was over four years ago; that's not reassuring. However, if we look at the shorter-term growth, the growth rank of year-over-year IP growth compared to what it's been on data back to 2007, the results show more promise. Portugal, Greece, and Spain each show growth rates that rank in the top ten-percent of what they posted over that period. France and Belgium show growth rates that rank above their respective, 50th percentiles in the 60th percentile range. This indicates that their growth rates are above their medians. However, for most of the monetary union members Austria, Germany, Finland, the Netherlands, Luxembourg, and Ireland, growth rankings are below the 50th percentile indicating growth below their medians during this span. And for most of these countries growth rate rankings are below their 25th percentile - that is, they lie in the lower quarter of all growth rates reported. This further emphasizes the weakness in growth. Although the union does show some pockets of strength and there seems to be some rebound in progress.

Making monetary policy in a 20-country union was never going to be easy. And coming out of a global pandemic was not going to make it any easier. But the problems faced by the ECB, the Bank of England, the Federal Reserve and others have common roots linked to polices to deal with the Covid crisis, the impact of Covid on global output, trade, and supply chains, the war in Ukraine and the elevated rate of inflation that has left most major money center countries with inflation above their respective targets.

In this situation, central banks have been trying to find the sweet spot for policy. Central bankers have been missing their inflation targets for three years - consistently. And while the Covid crisis disrupted growth and elevated unemployment (some places much more than others). Unemployment rates have returned to their pre-Covid lows or better, and yet inflation is still above target. In the 1980s and 1990s, we know what central banks would have done but these central banks are not those central banks. The names are the same, but the policies have been shifted to reflect different policy priorities.

EMU The euro area is a good example of all this; inflation has been over target since 2021 and the unemployment rate in the euro area has never been lower. And yet, this week, the ECB moved to cut rates. It did this even has the ECB shifted its inflation outlook higher at the current meeting. It is hard to say what analysis underlies this policy choice. The stated goal was to support the economy; at its meeting Christine Lagarde did not at all sound like she was planning a series of rate reductions. But the fact of the rate cut cannot be reassuring to those looking for the ECB to be the torchbearer for European monetary policy austerity.

GDP growth in the euro area solidified in Q1 but the year-on-year pace is still quite weak. Among the 12-EMU members reporting in the table in Q1, only the Netherlands reported a quarter-to-quarter GDP decline. However, Austria, Finland, Germany, Ireland, Luxembourg, and the Netherlands (six countries) log year-on-year GDP declines in 2024-Q1. Six member countries showed GDP declines year-over-year in 2023-Q4; six also show GDP falling in 2023-Q3; five GDP drops are counted in 2023-Q2. There is no arguing with the notion that growth in EMU is weak. But is it- was it- threatened in a way that a single 25bp rate cut alleviated risk? Did an isolated rate cut have any role to play at all in macroeconomic policy? What was the ECB trying to tell us with that cut?

Ranking growth rates for the 12 countries in the table shows only Greece with a year-on-year growth rate above its median growth pace on data since 1997. Globally, growth is weak- the U.S. is a notable exception; and yet as the year began, the Fed in the U.S. was preparing for as many as 3 rate cuts this year! Something at central banks has shifted. But inflation risks seem to have shifted too and for the worse. China is no longer the low wage force it once was. The peace dividend is looking as if it has been spent. A rearmament cycle now seems more likely. Are central banks operating differently or have they gone soft? We are about to find out.