Economy in Brief

Spanish headline inflation has clearly hit a sticky spot and stopped its tendency to fall. Inflation peaked in 2022. Headline inflation is now clearly up from its low point of early-2023 and moving sideways at a higher level above the 2 1/2 percent growth rate.

The Spanish HICP rate for February backed off from its January spike, growing by 0.4% in February, but that was after a 0.9% increase in January. As a result of that clustering of strong price gains, inflation is spurting. Spain’s inflation on the HICP shows 3% over 12 months, a gain over six months at a 4% pace, and a gain over three months at a 5.8% pace. That's a clear pattern of acceleration and of course a level of inflation on all horizons that's higher than the benchmark 2% pace that the ECB sets for the community as a whole.

Spain’s domestic CPI shows a similar pattern with the CPI up by 0.3% in February after a 0.8% gain in January. CPI inflation is up 2.8% over 12 months; that gain rises to a 3.4% pace over six months and a 4.8% pace over three months. Spain’s inflation rate is clearly climbing whether we look at the HICP measure or the domestic CPI measure.

Core inflation is usually better behaved because it omits the volatile inflation elements of the headline gauges. Spain's core is up by 0.4% in February after rising by 0.5% in January. The 12-month core inflation rate is at 2.5%; that pace decelerates to 1.7% over six months but then it rises, gaining to 4.8% at an annual rate over three months.

Spain's inflation rate over three months whether measured by the HICP or CPI headlines, or the core is clearly excessive. Over six months inflation is excessive on both headline measures, but the core comes in at only 1.7%. Over 12 months Spain's inflation is between the lower 2.5% core increase and the higher 3% increase on the HICP.

The bottom line on this report is not that it is mixed. The headline on this report is meant to reflect the fact that industrial production clearly continues to be weak, clearly continues to decline; however, the pace of decline shows signs of easing- both in terms of some of the sequential growth rates and in terms of the performance of the manufacturing PMI for the Monetary Union. The overriding message from the report is that conditions remain weak and are not recovering. However, there is a significant side-bar message here that things are not worsening and there are some signs of subtle improvement amid ongoing contraction that's the more complicated or sophisticated message from this month's report.

MFG PMI helps to sort out complicated assessments Overall industrial production declined by 3.2% in January after two straight months of increasing. Manufacturing output performs just about the same. However, the message from manufacturing PMI statistics is that manufacturing PMI indexes are higher month-to-month in January, in December and in November; there are higher sequentially over six months compared to 12 months and over three months compared to six months. However, the other message from the PMI gauges is that the PMI manufacturing statistic is below 50 on all those months and all those sequential horizons. So, there's a more complicated story that is told rather clearly by the PMI that tells us that PMIs are below 50 yet they have generally been improving.

For growth rates, industrial production shows manufacturing output falling 7% over 12 months reducing that to a 3% annual rate drop over six months and to a 4% annual rate drop over three months. From 12-months to six-months, the rate of decline is reduced, but then from six-months to three-months the rate of decline accelerates slightly.

Sector stories- Manufacturing sectors show consumer goods output is improving sequentially, moving from a 3.7% drop over 12 months to a small rise over six months to a 7.7% annual rate increase over three months. Durable goods, however, show a steady menu of declines over 12 months to three months without a clear trend. Nondurables output shows a decline over 12 months, then increases over three months and six months, but again, without a clear accelerating trend – but there is still an improving trend. Intermediate goods show an accelerating trend with output falling 2.6% over 12 months, trimming that decline to a -1.5% pace over six months, and then logging an increase at a 1.8% annual rate over three months. However, capital goods, a relatively important sector in the Monetary Union, show worsening conditions. Capital goods output falls 9.3% over 12 months, falls at a 9.5% annual rate over six months, and then accelerates the drop sharply to a -16.1% annual rate over three months.

Quarter-to-Date- Quarter-to-date (QTD) statistics for industrial production are, of course, tentative with only one month's worth of data for the new quarter in place. But here we are looking at the growth rate of the one-month new quarter index against the quarterly average of 2023-Q4. We see a double-digit decline in industrial production QTD at -11.6% pace and a decline in manufacturing at a -17.4% annual rate.

Manufacturing Production across the Monetary Union- Turning to the performance across the Monetary Union and other European early reporters, we see the output is accelerating in a minority of members in January. That's a weaker performance from the 69% proportion of accelerations reported in December, but it's more similar to the 38.5% acceleration rate logged in November. Sequentially output accelerated over 12 months in 45.5% of the monetary union members that stepped up to 69% over six months and then backed down to only 27% showing acceleration over three months. Of the recent three months, conditions are quite weak with a number of countries showing very substantial negative numbers and only Spain and Portugal produce strong positive growth rates over three months as well as six months. Quarter-to-date growth across countries shows declines in most countries with the exceptions being Spain, Portugal, Greece, and Belgium.

Growth rate rankings in historic context- The far-right hand column ranks growth by sector and by country by comparing the current year-over-year growth rate and industrial output to historic record back to 2007. On that timeline, all the aggregate monetary union growth rates are extremely weak. In fact, EMU sector growth rates are below the 15th percentile except intermediate goods which has a 31-percentile standing. Among EMU members, only two countries have growth rates that are above their historic medians (that is above a ranking at the 50th percentile) and the exceptions are Spain and Greece. For the other three reporting European economies (not EMU members), the U.K. growth rate has a 64.4 percentile standing, Sweden has a 53.7 percentile standing, and Norway has a 31.7 percentile standing. These standings are generally higher and more moderate than what we see among Monetary Union members.

Globally inflation statistics peaked sharply during the COVID, having since been running down and running down at a pace faster than what central banks had expected. But suddenly, this unwinding of inflation appears to have hit a rough patch and the pace of decline in inflation seems to be slowing or even reversing. German inflation statistics for February are inconclusive on this thought. The ECB-targeted HICP rate in Germany rose 0.2% in February with the core up by 0.4%. Germany's own domestic CPI gauge rose by 0.2% in February with its excluding energy measure up by 0.3%. On the face of it, there's nothing glaring about the monthly inflation data. Inflation diffusion, in fact, is quite tempered with month-to-month inflation rising for only 27% of the categories indicating a continuing tendency for inflation to decelerate.

However, sequential inflation data over 12 months, six months and three months show trends that are more equivocal. For Germany, the HICP index rises 2.8% over 12 months, slows to a 1.6% annual rate over six months, then rises back to a 2.9% annual rate over three months – indicating an acceleration over three months that takes it above its 12-month pace. The core measure for the HICP is up 3.6% over 12 months that tails to 2.5% annual rate increase over six months then jumps to a 4% pace as annualized over three months. The core for the HCP is uncomfortably high.

German domestic inflation shows the headline up 2.5% over 12 months, tailing to a 1.5% annual rate over six months then bouncing back to 2.4% annual rate over three months, reminiscent of the pattern that we see for the HICP headline. The German domestic CPI excluding energy rises 3.1% over 12 months, decelerates to a 2.6% annual rate over six months but then jumps to a 3.2% annual rate over three months, once again, like the pattern for the core HICP, but not as draconian in terms of the three-month rebound. Still, there's enough pressure strength and rebound over three months to be off-putting to the monetary authorities.

German inflation diffusion shows inflation accelerating at 72.7% of the categories over three months; that's up sharply from 36.4% accelerating over six months and 27.3% of them accelerating over 12 months compared to the previous 12 months. The notion of inflation accelerating is therefore a fairly broad-based over three months, but it's also a relatively new event.

Japan's GDP in the fourth quarter was revised from a decline to an increase of 0.4%, erasing the two consecutive quarters of negative growth that had previously been in play. With that development, the notion of a ‘rule-of-thumb’ recession in Japan has been set back on the sidelines. Still, growth in Japan fell at a 3.2% annual rate in the third quarter and only rebounded by 0.4% at an annual rate in the fourth quarter. The GDP revision is a pretty thin reed on which to hang optimism.

Year-over-year GDP growth in Japan is at 1.3%; that's down from a 1.6% year-over-year pace in the third quarter and down from a 2.3% pace that was logged in the second quarter. It’s not recession, but it is an ongoing loss in momentum.

In fact, Japanese growth, looking at the year-over-year rates averaged over a five-year period, comes in at only 0.2%, indicating what an extremely weak period this has been for the evolution of Japan's GDP.

Turning back to the quarterly data, real private consumption has fallen for three quarters in a row; this is not a good development. In the fourth quarter private consumption in real terms fell at a 1% annual rate, in the the third quarter it fell at a 1.4% annual rate, and in the second quarter, it fell at a 2.7% annual rate. If we take more perspective, Japan's private consumption fell by 0.5% year-over-year in the fourth quarter and fell by 0.1% year-over-year in the third quarter. Private consumption which is the bulk of GDP (53%) is extremely weak in Japan in the fourth quarter. Public consumption (another 21% of GDP) didn't help at all; public consumption fell by 0.7% at an annual rate after rising by 1.1% in the third quarter- but that had followed a 0.4% decline in the second quarter. The consumption portion of the Japanese GDP equation is quite weak.

The investment side shows some bounce back in the fourth quarter as gross fixed capital formation advances at a 4.2% annual rate in the fourth quarter after declining for two quarters in a row before that. Gross fixed capital formation is now up 2.2% over the last four quarters, a positive development. Investment on plant and equipment rose by a strong 8.4% at an annual rate in the fourth quarter, offsetting declines in the previous two quarters - a decline at a 0.5% annual rate in the third quarter and a decline at a 5.6% annual rate in the second quarter. This quarterly series has been particularly volatile as you can see from data in the table. However, if we look at year-over-year growth, the year-over-year percent change in plant and equipment are up at a 2.5% pace in Q4, an improvement from a 0.9% annualized drop in the third quarter; that drop is preceded by a string of increases.

Housing in Japan shows weakness with a decline of 3.9% at an annual rate in the fourth quarter and a decline at a 2.5% annualized rate in the third quarter after a series of quarterly increases and year-over-year gains for three quarters in a row. But residential investment is up by just 0.4%, annualized in the fourth quarter.

GDP-net exports turned positive in the fourth quarter after posting a small negative number in the third quarter and having put erratic numbers up over the last six quarters. Exports put in a good quarter in Q4, rising at a 10.7% annual rate after a 3.8% annual rate increase in Q3 and a 16.2% annual rate increase in the second quarter. Imports generally lag-behind exports, rising by 6.9% at an annual rate in the fourth quarter, more or less pacing with exports in the third quarter at 4%, and then declining sharply to fall at a 13.5% annual rate in the second quarter. Year-over-year quarterly exports are up 3.7% in the fourth quarter compared with 2.6% decline in imports. Imports are falling year-over-year for three quarters in a row while exports are putting in consistent moderate rates of real growth.

Domestic demand in Japan fell by 0.2% in the fourth quarter after falling by 3% in the third quarter and falling by 2.5% in the second quarter- all of these are annual rates. These three straight declines in domestic demand clearly are huge challenges for GDP looking ahead. Domestic demand in Japan is also lower year-over-year by 0.1% in the fourth quarter and by 0.1% in the third quarter; these numbers compare with 1% gain in the second quarter of 2023.

Domestic demand in Japan is weak; in fact, exports are playing a key role and holding GDP growth up. Exports help to contribute to a positive stimulus from the trade balance that boosts growth. However, it's surprising that even with domestic demand down by 0.2% at an annual rate in the fourth quarter, imports in real terms still increased by 6.9%.