Economy in Brief

European unemployment is very well-behaved Despite well publicized threats from all corners and all sorts of uncertainty, the unemployment rate in the European Monetary Union (EMU) ticked down to 6.2% in April from 6.3% in March, tying it for its lowest rate since the formation of the monetary union itself. In the broader Economic Union, the unemployment rate remained at 5.9% now; it's just a tick above its low point on the same timeline.

Unemployment remains low Over 12 months the EU unemployment has fallen by 0.1% while the European Monetary Union (EMU) unemployment rate has fallen by 0.2%. This is a period in which the situation in the Middle East has remained hot, the Russia-Ukraine war has dragged on despite efforts by Donald Trump to try to bring both participants in that conflict to the table to talk and to get a negotiated peace, even more prominently, during this time, the United States has been threatening tariffs! Economists have been looking for all kinds of bad things to happen but instead the unemployment rate continues to drop and inflation rates in the United States and in Europe have continued to edge slightly lower.

Are economic concerns overblown? I'm not going to claim that the economic concerns about uncertainty are completely unfounded or that we're not going to have some difficult economic times over tariffs eventually. But the decision by economists to ramp up concerns about uncertainty and how terrible uncertainty is, and how bad it's going to be for our economies, does not seem to be bearing fruit. Economics has moved from the notion that income and prices matter to the notion that income expectations and price expectations matter. We ae now firmly in the land of perceptions and expectations- but maybe we should also keep one foot in the land of reality - the Church of what’s Happenin’ now, as Flip Wilson Once called it in his comedy routine. We're in a period where there's very little going on in terms of policy change, but there's a lot that we expect to happen moving forward although we're not sure precisely what it is. There are concerns about how the tariff negotiations will work out and if there's going to be a trade war; certainly if our countries cannot civilly adjudicate their differences, a trade war will be very bad for the participants. But so far, all the gnashing of teeth about the impact of uncertainty is at the very least whistling past the graveyard.

Ongoing excellent performance Unemployment rates in the European Monetary Union in April fell in seven of the 12 reporting monetary union countries in the table. In March, unemployment rates fell in only one country, in Luxembourg. In February, unemployment rates fell in five of the 12 countries. Over three months, there were unemployment rate declines in five countries with unemployment unchanged in two. Over six months, unemployment rates fell in six countries and unemployment rates were unchanged in two. Over 12 months, unemployment rates fell in six countries. The declines over these broader periods of time seemed to be still, consistently in force.

Strong historic comparisons If we look at the levels of the unemployment rates evaluated since 1994, we find only three monetary union members with unemployment rates above their historic medians in this period. The exceptions are Luxembourg, Finland, and Austria. Including the countries at the bottom of the table that are not monetary union members, the United Kingdom (based on its claimant rate) is also above its historic median. Japan's rate is in its lower 12th percentile and the U.S. is in its lower 25th percentile. EU and EMU rates each rank within their lower five percentile! Altogether, it’s an impressive performance. Look at it. Read the economic/Financial press. Connect the dots- if that is at all possible.

The months readings are decidedly mixed. Four service sectors report stronger month-to-month and four weaker; manufacturing sectors report three weaker and five stronger. The composite headlines are split four-and-four.

Still, it’s not as if nothing is happening. On data back to January 2021, the average of the composite ranked in May has a 35-percentile standing – still below its median on the period. Services have slipped with a 28-percentile ranking well into the bottom one-third ranking position. Manufacturing has been rehabilitating despite the Russia-Ukraine war and the Trump tariffs, as the sector has an above median 60.4 ranking on its average reading.

On an individual country basis, the EMU, Germany, France, the United States, Australia, and India – all reporting countries except the United Kingdom and Japan show manufacturing PMI rank standings above their respective medians (above a ranking of 50%). But only Japan and India show service sectors with rankings above their respective medians and only India has a composite standing above its median on this timeline. And India is an exception with extremely high rankings across sectors.

The monthly average shows very little change from March to April to May. The composite and services readings get slightly weaker while manufacturing gets marginally stronger moving up from 49.9 in March to 50.5 in May- hardly a rocket shot. Similarly, there is little change from the 12- month to six-month to 3-month averages. Looking at 3-months to 12-months, the composite weakens from 51.6 to 51.2, manufacturing improves from 48.8 to 49.6 and services weaken from 52.4 to 51.3.

There is a great deal of grumbling about policy and U.S. tariff threats, but so far there is little evidence of impact. I’m sure there will be impact, but I am not as persuaded that ‘uncertainty’ ‘per se’ is the bogeyman everyone else wants to make it out to be. It can be an issue. But I expect Trump to resolve these issues so that the main impact I expect is the impact from the deals he makes.

This week, we examine the deepening divisions between the US and China, which are affecting not just trade but also investment flows, monetary policy, and technological development.

On the trade front, China has shifted from modest trade shares with its partners (chart 1) to capturing significantly larger shares across Asia, Africa, and Latin America (chart 2), while US progress in these regions has been more subdued. This signals a clear bifurcation, with China forging its own trading blocs, often at the expense of US market share. However, economies like Vietnam have managed to deepen trade ties with both countries (chart 3).

China’s efforts to strengthen relationships extend beyond trade to direct investment abroad (chart 4) and loan financing, particularly in Africa, where it has become a major investor in new projects. This has allowed China to cement a foothold in regions where US influence is limited. The bifurcation also extends to the monetary and currency space, with China gradually reducing its US Treasury holdings while increasing its gold reserves, possibly as part of a diversification push (chart 5). Concurrently, China’s push for de-dollarisation continues, despite significant hurdles.

Finally, US–China bifurcation is also playing out in the technological sector, where China has made significant advancements in critical areas, driven in part by substantial R&D investment over the years (chart 6). In response, US efforts to limit China’s access to key technologies may have inadvertently accelerated China’s development of its own systems and infrastructure, deepening the bifurcation further.

Shifts in China and US trade shares While economists may differ on when the broader US–China bifurcation began, many agree that the more significant phase of decoupling was triggered in 2018, when President Trump initiated the first wave of trade restrictions and tariffs against China during his first term. Prior to these sharp policy shifts—and before Trump took office—China’s share of total trade with several major global economies remained relatively modest, generally below 20%, as shown in chart 1. Similarly, the US also maintained a relatively balanced trade share with most partners, though its trade was more concentrated with neighbouring countries such as Canada and Mexico.

Global monetary reflation is once again underway. The United States, the European Monetary Union, and the United Kingdom are all our participants; Japan is the country going its own way continuing to tighten and to restrict policy through disciplined and tightening monetary growth.

Reflation afoot Among the other three countries that are showing monetary stimulus, the U.K. is leading the way with the sterling M4 growth rate up to 7.6% at an annual rate over three months. The U.K. data lag other data in the table; they're not up to date through April; still, the acceleration is quite apparent over three months. Over 12 months, U.K. money growth is 3.5%, U.S. money growth is 4.4%, and the European Monetary Union money growth rate is 3.6%. The annual numbers still represent reflation increases in the annual growth rates compared to where they have been in the last three years, although none of the year-over-year growth rates really look like they are yet excessive compared to inflation targeting plans and likely GDP growth rates. However, this is definitely a transition to reflation. The question is whether it will be tempered at the right point.

EMU trends In the European Monetary Union, the two-year growth rate and the three-year growth rates for money are under 2% while the 12-month growth rate is up to 3.6%. Monetary Union growth rate of real money balances is up over three months at 2.3% at an annual rate and at 1.5% over 12 months. European credit growth is picking up, as well, with private credit growth running at a 2.5% annual rate over three months and at a 2.3% pace over 12 months; in real terms, private credit growth year-over-year, however, is only 0.2%.

U.S. trends In the United States, money growth is up to 6.5% at an annual rate over three months, money growth has progressed from averaging 0.2% over three years, to 2.7% over 2 years, and now to 4.4% over 12 months. U.S. nominal money growth clearly is accelerating. Looking at the growth of real balances in the U.S., the real money stock is growing at a 4.9% annual rate over three months and at 2.1% at an annual rate over 12 months.

U.K. trends In the United Kingdom, there is that 7.6% three-month growth rate that compares to 3.5% over 12 months and to slower growth over 2 and 3 years. Real balance money growth is at a 3.3% annual rate over three months; over 12 months, the U.K. growth rate for real money balances is flat! While the U.K. seems to be in a period of relatively sharp acceleration for money growth, it's not yet a long-lived period of expansion, and so that has not yet had much impact on actual inflation developments. But the jack-rabbit start to monetary acceleration is something to be wary of.

Japan trends In Japan, M2 plus CD's is falling at a 2% annual rate over three months, and rising at only a 0.4% in an annual rate over 12 months. That represents a lower growth rate than its two-year or three-year growth rate for the money stock. In terms of real money balances, over three months Japan's real balances are shrinking at a 3% annual rate, the same as the 12-month growth rate. Japan clearly is using monetary policy to squeeze inflation lower.

Oil Disinflation efforts have been helped everywhere by oil prices that are falling in dollar terms at a 48.3% annual rate over three months and falling at a 24.6% annual rate over 12 months.