Economics

Your Tuesday Data Delight

In which we bring you eurozone inflation and Canadian GDP.

August—that interminable slow financial news month—is finally ending, and economic record keepers globally decided to go out with a bang. Tuesday brought an avalanche of data, running the gamut from Chilean unemployment (improving to 8.9% in July) to Slovenian GDP (accelerating from 1.7% y/y to 16.3% in Q2).[i] There were also some interesting nuggets from larger nations, so let us bring you the two we found most interesting.

Is Germany causing a eurozone inflation headache?

The eurozone released preliminary August inflation today, and headlines globally described the acceleration from 2.2% y/y to 3.0% (versus expectations for 2.7%) a “shock.”[ii] Shouldering much of the blame was Germany, which announced yesterday that inflation hit 3.4% y/y when using the standard EU calculation and 3.9% using the Federal Statistics Office’s standard approach.[iii] Analysts pointed to the country’s well-documented supply chain issues, which are starting to hamper manufacturing output—driving prices higher as customers compete for a limited supply of goods. With no end to these issues in sight, they argue, it is no longer fair to call higher inflation “transitory.”

To which we say, weeeelllllll, hold your horses. “Transitory” doesn’t mean here today, gone tomorrow. It means temporary. Similarly, shortages don’t mean prices keep rising month in, month out. Take Germany’s auto industry, for example. Several plants cut shifts due to the shortage of semiconductors, spurring double-digit drops in vehicle deliveries for some companies. If production hovers around July levels for the next year or two until new semiconductor foundries come online and increase the global supply, is that going to have an exponential effect on prices? Or will prices find a new equilibrium at the lower production level? Econ 101 would suggest the latter. One-time increases stay in the year-over-year calculation for a while because of math, but eventually they fall out, and the inflation rate moderates.

Now, this is of course an all else equal argument, and all else is never equal. But the US has already shown that extrapolating huge supply-driven price increases forward is an error. As the aforementioned semiconductor shortage hit the supply of new cars here, people turned to the used car lot. That heightened demand quickly burned through the available supply, driving prices higher. The used cars and trucks component of US CPI rose 10.0% m/m in April, 7.3% in May and 10.5% in June.[iv] But in July, used car prices stabilized, rising just 0.2% m/m. The year-over-year rate was a whopping 41.7% due to the cumulative effect of springtime price hikes, but that was a legacy effect, not a new price pressure.[v] This is one small category in one country, but in our view, it illustrates the broader concept well.

Supply chain issues that affect prices for a few months are real and pinch all of our pockets, but they do not qualify as actual inflation. Big price increases in select goods jump out, but inflation involves prices increasing across the entire economy, hitting goods and services alike. It is also a monetary phenomenon—too much money chasing too few goods and pushing prices higher steadily over a long stretch. That is what we saw in the 1970s. That is the sort of thing a central bank can curb with monetary policy. But a consumer price index skewed by temporary shortages of a handful of goods likely isn’t in central banks’ power to fix.

Oh Canada, Where Did Your Exports Go?

Canadian GDP delivered an even bigger shock. Consensus expectations, as tabulated by FactSet, were for a 2.5% annualized growth in Q2, a solid—if unspectacular—figure. Instead, GDP declined -1.1%, putting the recovery from last year’s recession on pause and spurring all sorts of handwringing in the Great White North.[vi]

Under the hood, things get interesting. Household spending grew just 0.2% annualized, as a -7.0% drop in spending on goods largely canceled out a 7.3% jump in spending on services.[vii] Business investment was similarly split. It fell -2.2% annualized as a -12.4% drop in residential construction erased a 12.1% rise in commercial real estate, machinery and intellectual property products.[viii] On the public side of the ledger, government spending rose 6.1% annualized but investment fell -7.7% as some COVID-related endeavors phased out.[ix] Crucially, however, none of this explains GDP’s contraction or the big surprise. Total spending contributed 3.1 percentage points to headline GDP, while total investment detracted just -0.7 percentage point.[x] If those categories were all there is, Canadian GDP would have grown.

Which brings us to the real culprit: Exports. Those fell -15.0% annualized, subtracting 4.7 percentage points from headline GDP.[xi] Services exports grew 4.6%, but goods exports fell an astounding -18.3%.[xii] That doesn’t come close to squaring up with the monthly trade reports, which showed exports falling -0.5% m/m in April and -1.9% in May before soaring 8.7% in June.[xiii] If you calculate quarterly growth manually using the monthly totals, you get a 0.8% q/q increase or 3.4% annualized.[xiv]

The gap, as best we can tell from looking at all the numbers and reading the entirety of Statistics Canada’s methodology materials (you’re welcome), is due to the inflation adjustment. On a nominal (i.e., not adjusted for inflation) basis, goods exports rose 0.6% q/q and 2.5% annualized, which is much more in line with the monthly data. Canadian monthly trade data are seasonally adjusted but not inflation adjusted, much like their US and global counterparts. According to Statistics Canada’s press release, export prices rose 4.9% q/q in Q2, which apparently was enough to result in a massively negative inflation adjustment.

But in our view, this isn’t really a negative development. Rather, it means Canadian producers have decent pricing power, which helps protect margins as prices rise—that is generally what you want to happen, from an investing standpoint. To offer a simple illustration, higher oil prices were undoubtedly a welcome development for Canadian oil companies, who have relatively higher extraction costs—and who represent a big chunk of Canadian exports. Ditto for higher metals prices and Canadian miners. So let this be a timely, simple lesson: Sometimes what is bad for GDP math is a-ok for corporate earnings—and the actual economy.



[i] Source: FactSet, as of 8/31/2021.

[ii] Ibid.

[iii] Ibid.

[iv] Source: St. Louis Federal Reserve, as of 8/31/2021.

[v] Ibid.

[vi] See Note i.

[vii] Ibid.

[viii] Ibid.

[ix] Ibid.

[x] Ibid.

[xi] Ibid.

[xii] Ibid.

[xiii] Ibid.

[xiv] Source: FactSet and Math, as of 8/31/2021.

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