yesterday,– Germany PMI Preview – Published data showed that “German business activity” had “declined at the fastest pace since May 2020”. Also released at the same time – Eurozone PMI Preview – Europe is headed for recession, or rather, stagflation, as the unemployment rate is set to sharply shrink, according to a report that “eurozone business activity accelerated in August as the recession in the region spread further from manufacturing to services.” rise, while inflation remains. at a high level. All because policymaking deliberately and unnecessarily pushed the country into recession. Across the Channel, Britain is going through a similar experience – with inflation falling rapidly and the economy slipping into recession. The common link is policy folly. The ECB and Bank of England have been raising interest rates as a “shadow-chaser” exercise – meaning that the drivers of inflation they claim to fight are not sensitive to changes in interest rates. But higher interest rates lead to higher borrowing costs, hurting the real economy. At the same time, fiscal policy is stepping back as the government feels it must create policy to complement the central bank’s rate hikes – implying two sources of tightening. For those commentators eager to return to the EU, they should look east and see how messed up the European economy is!
recession in europe
The apparent contraction in Germany now is quite astonishing.
The German Composite PMI Output Index reflected the results of the Manufacturing Output Index and the Services Business Activity Index.
This is the composite PMI from 2008.
Values below 50 indicate that more firms are shrinking than expanding.
The latest reading showed the index fell to 44.7 from 48.5, its fourth straight monthly decline.
Both manufacturing and services moved further into the sub-50 region of the index.
You can also see how the composite index predicts changes in GDP.
The German Manufacturing Purchasing Managers’ Index (PMI), derived from a survey of around 800 German companies, has a good track record of “providing the latest possible indicator of the real state of the private sector economy”.
The manufacturing PMI is a “composite index,” meaning it is compiled from five survey variables: new orders (weighted 0.3); output (0.25); employment (0.2); suppliers’ delivery times (0.15); and purchased material stock (0.1).
It answers the question: “Is your company’s production/output level higher, the same, or lower than it was a month ago?”
The chart below shows the Manufacturing PMI.
The PMI report said a “sharp decline in manufacturing new orders continued to drive the downturn,” accompanied by drawdowns in inventories and “investment caution”
In August the index was 39.1 – well below the 50 level turning point.
The comment says:
Hopes for the services sector to save the German economy have been dashed. Instead, the services sector is about to join the decline in manufacturing, which appears to have begun in the second quarter.
leading to a more severe recession.
What happens in Germany, the largest economy, greatly affects the situation across the euro zone.
This was also confirmed by Eurozone PMI data released yesterday.
According to the report:
…the region’s recession spread further from manufacturing to services. Output and new orders fell in both industries, but the decline has been steeper so far in goods-producing industries. Faced with deteriorating demand and a bleak outlook for the year ahead, companies are increasingly reluctant to expand capacity and hiring has come to a near standstill, with the latter slipping to its lowest level so far this year…Inflationary pressures continue to be well below what has been expected for years over the past two years Half the time, dominated by falling manufacturing prices…
This is typical policy overreach.
Inflation has been falling since the third quarter of 2022 as the factors driving it are temporary – pandemic, Ukraine bottleneck and OPEC+.
The supply disruption has largely eased.
Sure enough, Putin is still wreaking havoc, but supply constraints have eased somewhat as countries have found other markets due to supply shortages (especially grains etc.) caused by his lockdowns.
But the thing is, once the pessimism sets in, eventually retailers and the like see an increase in unsold inventory, which leads to lower factory order rates, which then reduces production and working hours, which then reduces overall employment, which then reduces investment in new factories and such , and eventually sales drop exponentially — and the cycle continues — and it’s hard to stop it.
This is especially true if fiscal and monetary policies are causing and exacerbating a recession.
Britain is going the same way
On August 16, 2023, the UK Office of National Statistics (ONS) released the latest data—— UK Consumer Price Inflation: July 2023 The data showed that UK inflation is falling sharply, from 7.3% in June to 6.4% in July.
In July 2023, the CPI fell by 0.3%, compared with a rise of 0.6% in the same period last year.
Inflation fell sharply in the UK, largely due to a sharp cut in the Office of Gas and Electricity Markets (Ofgem) energy price cap – from £3,280 to £2,074, a drop of 36.7%.
Ofgem is the UK energy regulator.
The price cap determines how much many UK households pay for gas and electricity.
That resulted in a 25.2% drop in natural gas prices for the month — “the largest recorded drop in natural gas prices since the series began in 1988, and representing a 0.44 percentage point decline in the contribution of natural gas to the monthly change in the CPIH” on an annualized basis. “
Electricity prices fell by 8.6% in July, putting further downward pressure on the overall CPI inflation rate.
Neither factor is associated with excess spending in the economy, nor is it particularly sensitive to changes in the Bank of England’s interest rate.
These supply factors are temporary and are currently being resolved to some extent.
Another interesting aspect of the UK’s July CPI data was the rapidly rising contribution of housing rents to the overall CPI result, a figure that resonated among other rate-hiking countries.
For the UK, it was up 1.7% for the month, “compared with a rise of 0.8% over the same two-month period last year”.
This is an example of managed prices – the government sets the rent.
I say this because the ONS tells us that the contribution to rising rents is “mainly from registered social landlord rents”.
This is again insensitive to interest rates and reflects the government’s fiscal policy settings.
As inflation falls, policymaking is pushing the economy toward or into recession.
Earlier this week (22 August 2023), we learned from the Confederation of British Industry’s monthly snapshot of manufacturing that UK factory production hadn’t hit its lowest level since 2020, when the country was first forced to recover due to Covid-19. closure.
The CBI’s “net balance” indicator (difference between the proportion of factories reporting an increase in output and those reporting a contraction) fell from +3 to -19 in July, a reading not seen since September 2020 .
For the three months to August 2023, 37% of the survey sample said production levels had fallen, while only 18% of respondents said production had risen.
Production fell in 15 of the 17 industries surveyed last quarter.
New orders dropped from -9 to -15.
Export markets have weakened considerably – this is due in large part to the aforementioned rapid contraction in Europe.
But the survey also showed cost pressures were easing — its measure of price expectations fell to the lowest level since February 2021.
So while inflation fell, policymaking created a new problem—loss of income and rising unemployment.
The information from the CBI is consistent with that from – UK PMI Preview – Published yesterday (August 23, 2023).
The results show:
UK private sector output falls at fastest rate since January 2021
The stagnation in new orders was partly due to “caution from higher borrowing costs” – an example of the impact of higher interest rates – according to the survey data.
The data confirmed that “inflationary pressures continue to moderate” as input costs (energy, etc.) fell sharply.
“Another economic contraction appears inevitable, with a deepening recession in manufacturing and a further faltering spring recovery in services,” the spokesman said.
On August 22, 2023, the Office for National Statistics released the latest news—— UK Public Sector Finances: July 2023 – This indicates:
1. Total public sector spending falls significantly over the year – £107,849 million in January 2023 and £97,249 in July 2023.
2. At the same time, total current income increased from £88,163 million in July 2022 to £92,948 million in July 2023.
That means fiscal policy hasn’t delivered any revenue growth to the country, as rising interest rates have squeezed rate-sensitive parts of spending like business investment.
The point is that the policy settings in Europe and the UK do not match the situation at all.
Inflation is falling not because interest rates are rising, but because the supply factors driving inflation are weakening and some regulated prices are being adjusted lower.
But fiscal policy is too tight and monetary policy is set absurdly.
These countries might reasonably look to Japan for guidance.
They are patient with inflation and seek to use fiscal policy to provide cash relief to household cost-of-living pressures while they wait for inflationary pressures to subside.
The Bank of Japan maintains the low interest rate regime because they understand that raising interest rates will not help address the main inflation drivers and will only hurt the interests of low-income mortgage holders.
We are now entering the second phase of neo-Keynesian follies.
Phase 1 – Raising interest rates to combat inflation that is not sensitive to interest rates.
Phase 2 – Austerity so that recession is inevitable.
The result would be a fix for inflation and the loss of income and jobs for millions as a consequence of this folly.
Meanwhile, William Keegan of The Guardian wrote his millionth article demanding that the UK vote to leave the EU and return to the EU, as if the EU were something to be desired.
His latest post (August 20, 2023) continues his roughly 800-word invective (which I won’t link to) that is basically nothing more than “I wish we voted differently.”
It’s as if to the east is the land of gold and to the west are all kinds of torture across the English Channel.
In fact, the West’s pain is self-inflicted and has nothing to do with the Brexit decision.
And in the East — as the recession looms, the dysfunction continues.
Enough for today!
(c) Copyright 2023 William Mitchell. all rights reserved.
