Economy in Brief

Inflation in the European Monetary Union picked up in July, rising by 0.4% compared with a 0.1% rise in June. Progressive inflation rates calculated over 12 months, six months and three months don't show a clear pattern, but the tendency is uncomfortable. The 12-month pace of 2.5% is exceeded by both over three months and six months. Over six months the pace jumps to 2.8%; over three months it backs down but by just a tick to 2.7%. To the extent that represents a pattern is not a good one.

The four largest economies in the Monetary Union each shows acceleration for July compared to June. Italian inflation jumped by 0.9% month-to-month in July after rising 0.2% in June. German inflation rose by 0.5% after rising 0.3% in June. In France, prices rose by 0.4% after rising 0.1% in June. Spain logged an increase of 0.2% after having prices fall 0.1% in June. These monthly numbers show a clear tendency toward acceleration.

Headline trends- Over three months the large country trends are mixed. Germany and Italy show accelerations in their respective HICPs over three months compared to six months. And both also show acceleration over six months compared to 12 months. But France and Spain each show weaker inflation over three months than over six months; Spain shows inflation steadily cooling from 12-months to 6-months to 3-months. Only Spain shows 3-month inflation below 12-month inflation. The 12-month pace of inflation is higher in July than in June for three of four large countries, again with Spain as the exception. Despite this inflation slowdown, Spain has also been a leading growth economy in the second quarter. However, below we will see that Spain’s core inflation trend tells a different story.

Core trends- Core (or ex-energy inflation) shows acceleration in Germany, Italy, and Spain. Despite Spain’s encouraging headline inflation and inflation progression, the core tells a different story. Spanish and Italian core inflation rates show steady acceleration from 12-months to 6-months to 3-months. Germany’s three-month pace exceeds its six-month pace and its 12-month pace; there is a slight one-tick reduction in the pace from 12-months to 6-months. On balance, core inflation is not encouraging. Core inflation rates are well above 2% over 12 months, ranging from 2.5% to 2.8%. The 3-month paces range from 3.1% to 4.3%.

Central bankers- Central bankers have been poised to announce rate cuts and the ECB has already started the process. But inflation developments do not seem to be encouraging for that process to continue. Meanwhile, the Federal Reserve in the U.S. continues to talk of inflation behaving and looking more manageable. In the U.S., there is some motivation for a policy shift from a steady rise in the rate of unemployment. Of course, cutting against this grain, is the BOJ that has been on a different path and just today announced a long-awaited rate hike.

Trend dilemma- The chart is clear that inflation in the U.S. and in EMU has dropped then has flattened out to a pace above target in both the U.S. and the EMU. The U.K. faces similar resistant trends. Central banks are eager to try to put growth back in gear. Recent EMU growth has been lackluster; growth in the U.S. has been much better, but the U.S. employment-creating machine shows signs of aging. Policy makers have a motivation to cut rates, but they also have a lengthening legacy of being over target. Something has shifted in their central bank reaction functions and priority schemes to create this difference. Inflation is no longer the only objective in town, and it may no longer be the main one. Alternatively, central bankers may have simply effectively loosened their targets by reducing their vigilance and adherence rather than shifting the actual target. They do this by excusing short-term overshoots but claiming 2% is still the long-term target. There has been a lot of criticism of central bankers targeting 2%. And while central banks continue to voice their devotion to 2%, their actions suggest something else.

EMU growth is a tick slower in Q2 2024 with a flash growth rate of 1.0%, down from 1.1% in Q1. Essentially, it’s an unchanged performance in the quarter at a slow one-percent annual rate.

The Q2 annualized quarterly pacer fails to slow in only two of the seven early GDP reporters in the table as Irish GDP ramps up to a 5.1% annual rate in Q2 from 2.8% in Q1 and French GDP steadies at 1.1%.

However, splitting EMU GDP into the four largest EMU economies (Germany, France, Italy, and Spain) vs. the rest, shows that the slowing is concentrated on the largest EMU economies. For them, growth slows on a weighted basis to a 0.8% pace in Q2 from 1.3% in Q1. The rest of the EMU is estimated to have flash growth at 2.0% in Q2 compared to 0.4% in Q1.

Over four quarters, the Q2 growth rates show EMU speeding up slightly to 0.6% in Q2 from 0.5% in Q1. The four largest EMU economies log growth of 0.8% in Q2, the same as in Q1, while growth in the rest of the EMU falls by 0.3% annualized compared to dropping at a 0.8% pace in Q1.

By country, the quarterly four-quarter growth rates slow in Belgium, France, and Portugal.

The annual four-quarter growth rates in Q2 show only Italy and Spain at a pace above their historic medians; however, Portugal is close with a 47.8 percentile standing. EMU growth has been stronger nearly three-quarters of the time. The four largest economies have been stronger nearly one-third of the time while the rest of the EMU has been stronger more often, about four-fifths of the time.

These ranking benchmarks help to establish a general relatively as a reference for the countries and the country groups as well as for the EMU. The median four-quarter growth among reporters at a 38-percentile standing is relatively stronger than the (weighted) EMU total. This is slightly surprising since four largest EMU economies log growth that ranks higher than for the rest of the EMU.

U.S. growth performance leaves the EMU and all its early reporters in the dust with the partial exception of Spain whose four-quarter growth rate of 2.9% is close to the U.S. at 3.1%. But the relative strength of U.S. growth is at its 73.9 percentile compared to Spain that has a stronger structural growth rate and logs growth only at a 56.5 percentile.

Bad weather is being cited for poor U.K. retail performance in July as sales compared to a year-ago in retailing fell to a net diffusion reading of -43 from -24 in June. However, expected sales are being marked down calling to question the notion that weakness is all weather-related.

Retailing Reported Sales- Orders compared to a year-ago dropped to a net reading of -40 in July from -14 in June. However, sales for time-of-year improved slightly to -36 in July from -39 in June. Stocks relative to sales moved sharply higher into a net +32 in July from a level of +3 in June. Stocks relative to sales showed a huge increase from June to July. The diffusion reading of +32 gives it a 97.5 percentile standing, a standing that has been its higher historically only about 2.5% of the time, marking it as quite unusual.

Sales Issues- An increase in stocks relative to sales like this would usually occur for unintended reasons and so this increase bolsters the argument that sales were unexpectedly weak in July. However, against this background, it’s also clear that sales compared to a year-ago, and orders compared to a year-ago, both have been weakening persistently from May, to June, to July; more than what can be explained by one-month’s bad weather. Sales for the time-of-year were also sharply weaker in June and July than they were in May despite the small improvement in July. The rank standings for both the sales measures and the orders show percentile standings in the bottom 10 percentile or lower by rank for all three of those metrics.

Expected Sales- However, with the July survey, we also get expectations for August. I would expect that if weather had been a primary factor causing conditions in July to be poor, we would expect some bounce back in August and that's not what we see in the survey. Instead for August, we see a sharp deterioration for expected sales compared to a year-ago and expected orders compared to a year-ago; both weaken in August compared to what had been posted for July. Once again sales for the time-of-year improved, this time in August to -21 from -29 in July. The expected stock-sales ratio is up sharply to 21 in August from zero in July and again to a 91.2 percentile standing. Meanwhile, the percentile standings for both the sales and the orders measures are weak in the bottom 15 percentile or lower.

Wholesaling Reported Sales- In wholesaling, we see a repeat of some of the dynamics that appear in retailing for July. Sales compared to a year-ago weakened sharply to -21 in July from -12 in June. Orders compared to a year-ago weakened to -11 in July from -6 in June. Sales for the time-of-year also weakened, and weakened more sharply, for wholesaling to -28 in July from +4 in June. The stock-sales balance for the time-of-year moved up modestly to +9 in July from +5 in June. The queue standings are still weak across the board, in wholesaling but quite different from what we observe for retail sales. Wholesale sales compared to a year-ago and sales for the time-of-year are both weak. But the year-ago measure has a 12.7 percentile standing and the time-of-year or seasonally-adjusted comparison is at a weaker 4.9 percentile standing. Orders compared to a year-ago have a 28.5 percentile standing, still weak, but not in the same dregs as those plumbed by sales measures. The stock-sales balance has a 36.3 percentile standing, elevated compared to the other measures, but again no comparison with the very high ranked standings that we see for inventories in retailing.

Expected Sales- Expected sales for August also show sharp deteriorations with sales compared with a year-ago falling to -19 in August from -4 in July. Orders compared to a year-ago fall to -11 in August from +2 in July. Sales adjusted for the time-of-year fall to -21 in August from -3 in July. The stock-sales ratio balance shows a rise to +9 in August from +4 in July. The ranked percentile standings once again produce the highest standings for the stock-sales ratio with a 39.6 percentile standing that is still below its median which resides at a standing at the 50-percentile mark. The two sales figures are quite weak with sales compared to a year-ago with the 13.3 percentile standing and sales for the time-of-year with a 9.8 percentile standing. Orders compared to a year-ago have a 27-percentile standing, still quite low and just above the lower quartile of its historic ranking of values.