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Is recent drop in sentiment signaling softer growth ahead?

Robert Brusca

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Japan's Ministry of Finance business outlook survey shows a slow but positive improvement in the outlook for employment among large firms, while the outlook for large manufacturing firms’ hiring continues to cycle and oscillate around zero (see Chart).

The assessment on current observations of the economy slipped to +4.4 for all large enterprises in the first quarter of 2026, compared to +4.9 in the fourth quarter of last year. For large manufacturing enterprises, the assessment slipped to 3.8 from 4.7. There were also slippages reported for medium-sized enterprises as well as for small enterprises; for both the total and manufacturing sectors, assessments were worse, the smaller the reporting unit (on both a net reading basis and a percentile standing basis).

The quarter-ahead assessment slipped to 3.7 from the 4.4 assessment of the first quarter for all large enterprises. For large manufacturing enterprises, the outlook slipped from plus 3.8 in the first quarter of this year to -1.1. The second quarter ahead outlook, however, improved to 4.7 from 3.7 for all large enterprises, and the manufacturing outlook for two quarters ahead picked up to 3.3 from -1.1 in the quarter ahead. However, that 3.3 outlook for large manufacturing enterprises is still below the first quarter assessment (of 3.8) as well as below the fourth quarter and the third quarter assessments of 2025.

The percentile standing of the quarter-ahead assessment for all large enterprises is 44.6. For manufacturing firms, the percentile standing is 38.4, and for nonmanufacturers it is 62.2. The percentile standing values compare the current observation with a history of observation readings back to 2007; values above the 50th percentile are above their historic medians. We can see for the quarter ahead for large enterprises all of their responses are above their medians, and the relative strength resides among nonmanufacturing enterprises; they report the highest standings.

For the second quarter ahead, the percentile standings slip for the total group of large enterprises as well as for manufacturing and nonmanufacturing, separately. This occurs even though the net assessments improve from the quarter ahead to two quarters ahead. You can get an inkling ‘why’ by looking at the ‘average’ and noting that the average two-quarter ahead reading has been higher than the average quarter-ahead reading. So, to rank higher than the quarter-ahead, the second-quarter ahead has a higher hurdle to go over. The standing for nonmanufacturing slips from a 62.2 percentile for the quarter ahead to a 58.1 percentile standing for the second quarter ahead. Large manufacturers take a relatively large step back to a 28.4 percentile standing two quarters ahead from the 38.4 percentile for one quarter ahead. These step backs are reflected in the headline which steps back to 37.8 for two quarters ahead from a 44.6 percentile standing for the first quarter ahead.

What is evident in this survey is that large enterprises that the MOF surveys are becoming increasingly pessimistic as we look farther into the future, since the current rankings for all large enterprises, large enterprise manufacturers, and large nonmanufacturers show the strongest percentile standings among this triad of readings for the current quarter, with the quarter-ahead standings weaker and two-quarter-ahead standings weaker still. This growing pessimism is not a good feature.

**Medium and small enterprises not as dismally inclined**
**Medium-sized firms:** The transit to greater pessimism that we see for large enterprises as we look further into the future does not carry over to medium enterprises. Medium enterprises do see lower readings for the quarter ahead compared to the current-quarter assessments, and generally the quarter ahead provides assessments that are below the 50% mark, making them below median expectations as well. However, for two quarters ahead, the percentile standings improve, and at least for medium-sized manufacturing enterprises, there is a reading above the 50-percentile mark for that category two-quarters ahead, putting it even above the 45.2 percentile reading posted for the current quarter.

**Small firms**: For small enterprises, there is no real generalization across the various types of firms. Manufacturing firms’ percentile standing from the current quarter to the quarter ahead just about halve themselves, a sharp step back for manufacturers. However, for nonmanufacturers, there's an improvement from a 56.2 percentile standing in the current quarter to a 60.3 percentile standing in the quarter ahead. These two groups are moving in opposite directions for two quarters ahead. Manufacturers stop that deterioration and gain back just a small measure of what they lose in the quarter ahead with their two-quarter ahead standing, while nonmanufacturers lose some of their ebullience as the percentile standing drops to a 50.7 percentile reading from 60.3 but still sports an above-median value.

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**Summing up**
As a bellwether, the large enterprises and particularly manufacturing firms are the preferred gauges. On this basis, the results of the survey are disappointing. Although current assessments are quite fine, the outlook is certainly off-putting and that may be surprising with new Prime Minister, Takaichi, having just taken office and won a large majority in a snap election. Perhaps firms are more concerned about prospects for fiscal policy and whether there will be excessive stimulus and possibly they are also more concerned about the potential for the Bank of Japan to be held back from raising rates to contain growing inflationary pressures. But even with the new apparently very popular Prime Minister in office, it's surprising to see the MOF survey create such a weak set of readings.

Japan

MOF Japan Business Outlook Survey

Andrew Cates

**The Blue Chip Growth Consensus**
The first chart this week tracks the evolution of Blue Chip consensus forecasts for 2026 real GDP growth over the past six months for the United States, China and Taiwan. What stands out is the remarkable stability—and in some cases gradual improvement—in growth expectations, even as the geopolitical backdrop has become more unsettled. A backdrop of intense geopolitical instability in the Middle East historically tends to introduce downside risks to global activity through higher energy prices, shipping disruptions and financial market volatility. Yet the consensus outlook for the world economy has so far remained broadly resilient. One reason may lie in the continuing strength of investment tied to artificial intelligence. Taiwan’s growth outlook has been revised steadily higher in recent months, reflecting its pivotal role in the global semiconductor ecosystem and the infrastructure build-out associated with the AI boom. In that sense, the chart captures an interesting juxtaposition in the current global economy: rising geopolitical uncertainty on the one hand, and a powerful technology-driven investment cycle on the other.

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**Sentiment surveys**
The picture becomes somewhat less reassuring when we turn to global sentiment indicators. The latest Sentix global economic expectations index shows a sharp deterioration in March, interrupting what had been a gradual improvement in global economic sentiment over the past year. Notably, the survey period coincided with the early stages of the recent escalation in tensions in the Middle East, suggesting that rising geopolitical risks may already be weighing on investor and analyst expectations. While the current conditions index remains relatively firm—consistent with the still-resilient growth outlook seen in the Blue Chip forecasts—the sudden downward lurch in expectations is potentially more concerning. Historically, sharp declines in forward-looking sentiment indicators such as this have sometimes served as early warning signals of a softening global growth environment, particularly when they coincide with rising energy prices and heightened geopolitical uncertainty.

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**The Blue Chip Inflation Consensus**
Turning to inflation, the latest Blue Chip revisions suggest that forecasters have so far made only very modest adjustments to their outlook for 2026 consumer prices. As the chart shows, the largest upward revision this month was for India, while smaller increases were recorded for Australia, the euro area and South Korea. Elsewhere, forecasts were largely unchanged. What is notable is the absence of more widespread upward revisions, particularly given the sharp climb in oil prices in recent days following the escalation of tensions in the Middle East. For now, panelists appear to be assuming that the energy shock will prove either temporary or limited in scope. However, should higher oil prices persist—or begin to filter through more broadly into transportation and production costs—this relative stability in inflation forecasts could come under greater pressure in the months ahead.

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**Oil prices and short-dated yields**
The next chart highlights the close relationship that often emerges between energy prices and expectations for U.S. monetary policy. Over the past year, movements in the price of West Texas Intermediate crude have tended to be mirrored—albeit imperfectly—in shifts in the yield on two-year US Treasury notes, a market-based proxy for expectations about the Federal Reserve’s policy path. The correlation between the two series has been relatively strong, reflecting the fact that oil price swings can influence inflation expectations and therefore the outlook for interest rates. Yet despite the recent sharp rise in oil prices associated with the escalation of tensions in the Middle East, there has so far been no comparable move higher in two-year Treasury yields. This relative stability suggests that financial markets may be assuming that the latest oil shock will prove temporary or, at least, insufficient to materially alter the Federal Reserve’s policy trajectory.

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**Oil exposure**
Staying with the theme of Middle East instability, the next chart highlights the varying degree to which major economies remain exposed to fluctuations in global oil markets. Measured as a share of GDP, Japan, China and several major European economies remain significant net importers of crude oil, leaving them more vulnerable to sustained increases in energy prices. Germany, France and Italy all retain notable import dependencies, while the United Kingdom’s exposure is comparatively modest. By contrast, the United States is now close to balance in crude trade, reflecting the transformation brought about by the shale revolution, while Canada stands out as a substantial net exporter. These differences matter in the current environment. Should geopolitical tensions lead to a sustained rise in oil prices, the macroeconomic burden would likely fall most heavily on the large importing economies, particularly in Asia and parts of Europe, where higher energy costs could weigh on growth and complicate the inflation outlook.

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**Oil prices and inflation**
The final chart stays with the theme of Middle East instability by highlighting the extent to which oil price movements tend to feed through into inflation dynamics across Asia. The five-year correlations between Brent crude prices and energy-related CPI inflation are positive and, in several cases, quite strong. Thailand, China and Malaysia show particularly high sensitivities, suggesting that swings in global oil prices are quickly reflected in domestic energy costs. India and Japan also display meaningful correlations, while the relationship is somewhat weaker in Singapore and Taiwan and even slightly negative in South Korea over this period. The broader message is that oil shocks rarely remain confined to energy markets alone. In many Asian economies, they transmit relatively quickly into inflation, potentially complicating monetary policy decisions if geopolitical tensions were to drive a sustained rise in crude prices.

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The past few days have seen financial markets rattled by a sharp escalation of tensions in the Middle East, with oil prices rising, risk assets wobbling and investors reassessing the potential macroeconomic fallout from a possible energy shock. Yet, taken together, this week’s charts suggest that the global economic outlook has so far remained relatively resilient. Blue Chip consensus forecasts for 2026 growth have held steady in recent months, with Taiwan’s steadily improving outlook hinting at the ongoing influence of the global AI investment cycle. That said, forward-looking sentiment indicators are beginning to show some cracks: the latest Sentix expectations index registered a sharp deterioration in March, potentially reflecting rising geopolitical uncertainty. Inflation expectations, by contrast, have shifted only modestly, with forecasters making few meaningful revisions despite the recent surge in oil prices. Financial markets appear to share that view, as movements in two-year US Treasury yields—often a proxy for expectations of Federal Reserve policy—have not mirrored the sharp rise in crude prices, suggesting investors currently see the oil shock as temporary. The final charts highlight why energy markets nonetheless remain central to the outlook: many major economies remain significant net oil importers, and in much of Asia oil price movements feed quickly into consumer energy inflation. Should geopolitical tensions persist and keep crude prices elevated, these channels could yet transmit broader macroeconomic pressures in the months ahead.

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Charts of the Week: Geopolitics Meets the Global Economy

Michael J. Moran

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The consumer price index rose 0.3% in February, a touch above the average in the prior six months. (Measured with more precision, the latest change was 0.27%, up from an average of 0.23% in the prior six months.) The increase left the year-over year change at 2.4%, the same as in January.

The food and energy components account for the above-average increase In February, as both posted high-side readings (0.4% and 0.6%, respectively). The increase in energy prices was not especially troubling, as it followed a drop of 1.5 percent in January and did little damage to a tame underlying trend, although that friendly trend will begin to shift in response to the conflict in the Middle East. The increase in food prices, while not alarming, should not be downplayed, as it marked the second noticeable advance in the past three months (0.6% in December).

Excluding food and energy, prices rose 0.2%, matching the average of the past six months and keeping the year-over-year change steady at 2.5%. The core component seemed uneventful at first blush, but in fact it showed two notable changes: apparel prices rose 1.3% and airfares jumped 1.4%. These areas often move erratically, with sharp increases typically followed by discounting within a few months. That pattern could well unfold again, but both areas also have shown hints of stirring in the past few months. Apparel prices have now increased for four consecutive months, with the latest change pulling the level of the index out of the range in place in the past two years. The increase of 1.4% in airfares followed jumps of 6.5% and 3.8% in the prior two months, and this index also jumped out of a tight range that had been in place. Given the volatile nature of these items, odds favor easing in coming months, but they bear watching.

Outside of apparel and airfares, the core CPI was well behaved, with most areas showing modest changes. The favorable performance is evident in the breakdown of core prices between goods and services. During 2024 and much of 2025, an acceleration in goods prices seemed an inflation threat, but this area has cooled recently. Service prices also raised questions about the inflation outlook last year, as the steady deceleration came to a halt in the spring and summer. However, core service prices again began to decelerate in the fall. The pace of deceleration has slowed in the past few months, influenced by airfares, which hopefully will shift gears soon.

The outlook for core service inflation also has improved because of an easing in rental inflation. As inflation cooled after the 2021-22 burst, rents joined the trend but moved much more slowly than other areas. However, the pace of deceleration picked up late last year, with October and November registering modest increases. High-side readings in December and January suggested renewed upward pressure on rents, but a modest increase in February (0.1%) raises the possibility that rents will be less problematic than in the prior few years.

The Consumer Price figures can be found in Haver's **USECON** database. The expectations figure is contained in the **AS1REPNA** database.

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- Food and energy post above-average price increases.
- Ex food and energy, apparel and airfares misbehave...
- ...but most other areas showed modest price changes.

February CPI: Moderate Increase Despite Jumps in Volatile Areas

Kathleen Stephansen, CBE

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Mortgage applications rose 3.2% w/w (44.7% y/y) in the week ending March 6 after rising 11.0% w/w (55.9% y/y) in the week ending February 27, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. Applications for loans to purchase a house rose 7.8% w/w (10.8% y/y) in the latest week, after rising 6.1% w/w (10.0% y/y) in the prior week.  Applications for loan refinancing edged up 0.5% w/w (80.7% y/y) in the week ending March 6, after a jump of 14.3% w/w (108.8% y/y) in the February 27 week.

The effective interest rate on a 30-year fixed-rate loan rose 12bps to 6.36% in the week ending March 6 from 6.24% in the week ending February 27. The rate on 15-year fixed-rate mortgages rose 7bps to 5.71% in the latest week from 5.64% in the prior week. The 30-year Jumbo rate rose 10bps to 6.35% in the March 6 week from 6.25% in the February 27 week. The rate on a 5-year ARM was unchanged at 5.50% in the week ending March 6 from the February 27 week.

The share of applications for refinancing an existing loan dropped to 57.8% of total applications in the week of March 6 from 59.8% in the February 27 week. The adjustable-rate mortgage (ARM) share of activity edged up to 8.9% in the March 6  week from 8.8% in the February 27 week.

The average size of a mortgage loan declined 1.3% w/w (-0.4% y/y) to $418,100 in the week ending March 6, after rising 1.6% w/w (6.1% y/y) to $423,400 in the week ending February 27. The average size of a purchase loan declined 1.0% w/w (-3.1% y/y) to $446,400 in the latest week, after rising 1.8% w/w (0.6% y/y) to $450,900 in the week ending February 27. The average size of a loan to refinance a mortgage dropped 1.9% w/w (+7.2% y/y) to $397,400 in the week ending March 6, after rising 1.6% w/w (20.4% y/y) to $404,900 in the week ending February 27.

The Mortgage Bankers Association Survey covers 75% of all U.S. retail residential mortgage applications and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts. The base period and value for all indexes is March 16, 1990=100. The figures for weekly mortgage applications and interest rates are available in Haver’s **SURVEYS** database.

- Both applications for loans to purchase and for loan refinancing rose.
- Effective interest rate on 30-year fixed loans rose 12bps to 6.36%.
- Average loan size declined.

U.S. Mortgage Applications Rose Again in the March 6 Week

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Japan's economy may not be firing on all cylinders, but the economy is looking pretty firm, and consumer confidence is just pushing up through an area that has defined several of its post-COVID peaks. Inflation in Japan is uncomfortable. The PPI index rose 0.2% in January and is running at 2.4% year-over-year. The headline CPI for January declined by 0.1% and is running at a 2.4% annual rate, above the Bank of Japan’s preferred target. However, it only has a 61.7 percentile standing compared to a 71.7 percentile standing for the PPI—above its median but not terribly high on data back to 2006.

**Retail sales**: Key Japan activity variables are showing sustained expansion. Retail sales in January rose by a sharp 4.6%. The sequential growth rate for retail sales mushrooms from a 1.9% pace over 12 months to a 7.3% pace over six months to 15.8% pace over three months. That’s very solid and extremely strong.

**Exports**: But with the yen weak on global exchange markets, Japan's exports rose by 9.9% in January. The sequential growth rate for exports is 16% over 12 months, which jumps to a 38.7% pace over six months and then jumps again to a 67.8% annual rate over three months. These are stunningly strong figures.

**Jobs**: Employment in Japan continues to show month-to-month gains, but the gains are not historically strong, even though the sequential performance is sound at 0.5% growth over 12 months and picking up to 0.6% at an annual rate over three months. That’s not bad for a country with fading demographics. However, the standing for employment is only at its 45th percentile, putting it below its median, which occurs at a ranking of 50%. On the other hand, the ranking is not far below its median, with its 45.3 percentile standing.

**LEI**: Japan's leading economic index rose by 1.9% in January, accelerating from its December increase of 0.6%. Again, the sequential growth rates for the LEI are strong and hint at acceleration, with a 2.5% gain over 12 months, a 9.9% annual rate gain over six months, a pace that is nearly maintained over three months, where the growth rate comes in at a nearly identical 9.2%.

**Surveys**: The LEI, viewed as a level, is showing ongoing gains and has a historic standing that is near its historic median. The economy watchers index has weakened in the past few months, but the sequential averages show ongoing upward momentum and a historic ranking above its median at a standing in its 52nd percentile.

**Inflation**: The inflation numbers are the ‘fly in the ointment’ for Japan, although neither the PPI nor the CPI headline (headline excluding fresh food) shows a tendency - a strong tendency - to accelerate. However, there's a war in the Middle East. Oil prices are going up, and that’s going to hit Japan hard — and it’s going to have an inflation effect.

**What will central bankers do?** One of the key questions moving forward is how central banks are going to deal with the inflation effects from oil, because while it clearly gives a supply shock, it's a relatively large one and nobody is sure how long-lived it's going to be and how much of this supply shock will get into the core inflation measures beyond just the headline.

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**Summing up**
The big argument up to this point in Japan has been about the Bank of Japan and whether it's going to raise rates, with inflation above its target and interest rates clearly below a level that would be considered normalization. That is still a goal, and as the economy gets stronger, the BOJ should try harder for normalization. Japan also has a new Prime Minister who just also won a snap election with a large majority. She is looking to engage fiscal policy, but fiscal policy in Japan's current economic and inflation conditions may not be the right tact for Japanese stability. Special industrial policy might work better, and the focus may actually shift there. Japan does have large fiscal deficits and massive accumulated fiscal debt, even though it owes most of the debt to itself—to its own people. Still, the possibility of something going wrong means the possibility of something going wrong that could have a massive impact on the economy, so playing the fiscal policy game carefully and running the proper monetary policy is going to be important in Japan. The prospect of doing that correctly has been made more complicated by the yen’s ongoing weakness and by surging oil prices. It's a global environment that has become more treacherous for policymakers and even those in Japan where the economy is performing quite well.

Japan Indicators: Strong Economy—Still, Large Question Marks

Winnie Tapasanun

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Existing home sales rose 1.7% m/m (-1.4% y/y) to 4.09 million units (SAAR) in February, the second monthly rise in three months, following an upwardly revised 5.9% decline to 4.02 million in January (previously -8.4%; 3.91 mil.), according to the National Association of Realtors (NAR). The Action Economics Forecast Survey had expected February sales of 3.90 million units. Despite the m/m rebound, sales remained 36.4% below a high of 6.43 million in January 2022 and 38.0% below a peak of 6.60 million in January 2021. February’s recovery coincided with a drop in the average 30-year fixed mortgage rate to 6.05% in February, the lowest since August 2022, after declining to 6.11% in January, according to Freddie Mac. The sales figures are based on closings of sales contracts signed over the past couple of months.

Existing single-family home sales increased 2.5% (-1.1% y/y) to 3.73 million units in February, the second m/m gain in three months, after a 6.2% drop to 3.64 million in January. Sales of condos and co-ops fell 5.3% (-5.3% y/y) to 360,000 after a 2.6% January decline to 380,000, marking the third m/m fall in four months and the lowest level since May 2025.

By region, February existing home sales mostly increased m/m. Sales in the West jumped 8.2% (-1.3% y/y) to a one-year-high 790,000 in February, reversing a 6.4% decrease in January. Sales in the South rose 1.6% (0.5% y/y) to 1.89 million after a 6.5% January drop. Sales in the Midwest grew 1.1% (-4.1% y/y) to 940,000 following a 6.1% January fall. These three regions posted the second m/m increase in three months. Sales in the Northeast, however, fell 6.0% (-4.1% y/y) to 470,000, the lowest level since October 2024, following a 2.0% January decline and two consecutive m/m increases. Notably, the South remained the dominant region, accounting for 46.2% of total U.S. existing home sales.

The median price of all existing homes (NSA) rose 0.8% (0.3% y/y) to $398,000 in February, the first m/m rise in four months, after a 2.5% decline to $395,000 in January ($396,800 initially). Prices remained 8.0% below a high of $432,700 in June 2025. The median price of an existing single-family home, up for the first time since October, increased 0.9% (0.2% y/y) to $401,800 in February after a 2.8% decline to $398,200 in January (the lowest level since January 2025). The median price of condos and co-ops fell 1.9% (+0.9% y/y) to a one-year-low $358,100, the first m/m fall since November, following a 1.1% January increase to $365,000. Regionally, overall prices rebounded m/m in the West (+3.0%; -1.9% y/y), South (+1.7%; +0.2% y/y), and Midwest (+1.3%; +2.3% y/y) in February, but fell m/m in the Northeast (-4.8%; +3.3% y/y).

Inventories of homes for sale increased for the second successive month in February. The number of existing homes for sale (NSA) rose 2.4% (4.9% y/y) to 1.29 million units, the highest level since November, following a 2.4% January rise to 1.26 million and three straight m/m declines. The supply of homes on the market at the current selling rate (NSA) held at 3.8 months in February and January after falling to 3.5 months in December (the lowest since January 2025). The recent high of 4.6 months was in August 2025, while a record low in supply of 1.6 months was in January 2022.

The data on existing home sales, prices and affordability are compiled by the National Association of Realtors. The data on single-family home sales extend back to February 1968. Total sales and price data and regional sales can be found in Haver's **USECON** database. Regional price and affordability data and national inventory data are available in the **REALTOR** database. Mortgage interest rates can be found in the **WEEKLY** database. The expectations figure is from the Action Economics Forecast Survey, reported in the **AS1REPNA** database.

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- February sales +1.7% to 4.09 mil.; -1.4% y/y, fourth straight y/y decline.
- Sales m/m up in the West (+8.2%), South (+1.6%), and Midwest (+1.1%), but down in the Northeast (-6.0%).
- Median sales price +0.8% (+0.3% y/y) to $398,000, first m/m increase since October.
- Unsold inventory +2.4% (+4.9% y/y) to three-month-high 1.29 mil. units; 3.8 months' supply.

U.S. Existing Home Sales Unexpectedly Rebound in February

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German trade flows weakened in January, with imports dropping 5.9% month to month and exports falling 2.3%. With both flows falling sharply and imports dropping at more than twice the rate of exports, the trade surplus in the month ballooned to €21.2 billion from €17.4 billion in December.

The progression of nominal growth rates for exports shows the slowing from 0.6% over 12 months to 0.3% over six months to -3.1% at an annual rate over three months. The import decline is weaker and is gathering even more downward momentum, with imports falling 4% over 12 months, dropping at a 7.4% annual rate over six months, and reaching a 15% annualized decline over three months.

Measured in real terms, exports fell by 2.9% in January as imports fell by 6.8%. The sequential growth rates for German exports and imports both show progressive deterioration, with imports weakening faster than exports. This trend is worrisome because it says that the nominal weakness is not just because of what prices are doing. Weak imports usually indicate weak domestic demand; for Germany, that could be a really bad signal. In addition, because Germany exports so much to other EMU nations, German export weakness raises questions about demand strength among fellow EMU members - and about global demand in general.

**Lagged trends**
Lagged results give us a look into export and import trends with a one-month lag. As of December, both exports and imports still rose month-to-month. Sequential export growth was steadily accelerating, while sequential import growth rates were already decaying. German consumer goods exports were accelerating sequentially, and the ‘other exports’ category is not on its own acceleration path, but the category remains strong.

For imports, the overall nominal flows were decelerating from 12-months to 6-months to 3-months. Capital goods and motor vehicle imports both showed sequential weakening. Consumer goods imports were oscillating but still generally strong. Other imports were on a recent accelerating path, switching from negative 12-months growth to a 1% gain over six months and a 4% pace of increase over three months.

**Summing up**
On balance, German trade trends show a lot of weakness. Much of it seems to have welled up in January ahead of the new Middle East conflict. Right now, German economic data and diagnostic trade data are not sending out good signals about the German economy.

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Germany

German Exports and Imports Slide in January; Sharp Import Drop Boosts Surplus

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**The German industrial sector falters**
German industrial output in January fell for the second month in a row; it has a sequential pattern of growth rates becoming progressively weaker from 12-months to six-months to three-months. This is not a good pattern or development. Orders also fell sharply in January, dropping by 11.1% month-to-month. At least the orders progression is not as clearly negative as it is for industrial output, but over three months real manufacturing orders are declining at a 1.8% annual rate even though the 12-month and six-month growth rates of orders still show solid positive growth results.

These data are up-to-date through January, so they do not contain any effects of the new conflict in the Middle East.

**Sequential output trends**
German industrial output trends show progressively weaker numbers from 12-months to six-months to three-months. Consumer goods output and intermediate goods output show progressively weaker sequential results. Capital goods output shows a skinny rise of 0.1% over 12 months, a 6.6% decline at an annual rate over six months, and then a lesser pace of decline of 2.8% over three months. Capital goods output is not getting progressively weaker; however, it has been weakening and the trend is disappointing.

**German survey results are less dire**
Other indicators of German industrial activity generally show improved monthly results. All four of the metrics in the table show improved survey values in January compared to December, but December had showed weakness relative to November across the board for those 4 metrics. The message from progressive averages in the table, from these other indicators, is that not much has changed that would allow us to discriminate strongly among activity performances reported over 12 months, six months, or three months. In the end, the three-month values are generally slightly stronger than the 12-month values, but not in a way that looks significant, and even that result does not hold for the ZEW current index.

**Industrial production in other Europe**
Industrial production trends for other European reporters show declines in output in January of a fairly substantial magnitude in Spain and in Ireland, against strong increases in Portugal, Sweden, and Norway, and the more modest increase in France. IP in January shows cross-currents and a good deal of extremism in other Europe. The progressive trends for manufacturing production show Spanish and Irish trends deteriorating sharply from 12-months to six-months to three-months France and Portugal report uneven results that do not clarify what the underlying trend is doing. However, in northern Europe, Sweden and Norway are showing sharply accelerating growth from 12-months to six-months to three-months.

**Quarter-to-Date (as of January)**
In the quarter to date, German manufacturing output is falling overall and for all its major components. German real manufacturing orders are falling at a 30.3% annual rate in the quarter to date, which is a nascent statistic since only January data are available now. The other industrial indicators show positive trends for most measures, with the IFO manufacturing expectation being the exception, as it weakens. Industrial production for other Europe shows sharp quarter-to-date declines in Spain and Ireland, with extremely strong quarter-to-date results in Sweden and Norway; there is strong performance from Portugal and a solid increase from France.

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**Summing up**
On balance, the industrial production picture for Germany shows a decline, with a drop in orders raising more eyebrows about what the future may have to offer. The industrial surveys are a counterpoint, showing relatively more strength and stability than German IP trends. Meanwhile, the rest of Europe doesn't give us much to go on, because performance there clearly is bifurcated, with trends operating at cross-purposes. The long and the short of it, is that the long-awaited industrial revival in the wake of COVID and the Russian attack on Ukraine, is still not in gear - certainly not in Germany, and not in Europe.

German Output Trends in January Break Lower

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New figures show that real GDP grew 0.7% in the fourth quarter of 2025, revised down from the initial estimate of 1.4%. The pace was among the slowest of the past few years, but the result was not especially troubling, as the government shutdown acted as a notable constraint on economic growth. Federal spending fell 16.7% in Q4, which subtracted 1.2 percentage points from the advance in GDP.

Other sectors performed reasonably well, as shown by an increase of 1.9% in final sales to private domestic purchasers, a pace close to the economy’s potential. (In addition to government spending, final sales to private domestic purchasers excludes the influence of net exports and inventory investment. It is sometimes called private domestic final demand – PDFD.)

Although the pace of PDFD was respectable, it was the source of most of the downward revision to GDP growth, with the new figure one-half percentage point off the initial estimate of 2.4%. Consumer spending made the largest contribution to the downward revision with growth slowing from 2.4% to a still-respectable 2.0%. Most of the adjustment occurred in the service area, but spending on services remained firm with growth of 2.7%.

Business investment spending also was lighter than previously believed (2.3% versus 3.7%). The revision, however, was not especially surprising, as most of the adjustment occurred in construction of business structures, which has been notably soft recently. Indeed, investment in structures has now declined for eight consecutive quarters. Business outlays for software also were revised downward (3.8% versus 7.1%), but spending on equipment was a bit firmer than previously estimated (3.9% versus 3.2%).

The GDP data can be found in Haver’s **USECON** and **USNA** databases. **USNA** contains virtually all of the Bureau of Economic Analysis detail in the national accounts. The Action Economics consensus estimates can be found in **AS1REPNA**.

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- Consumer spending and business investment in structures accounted for most of the adjustment.
- Although growth was slow, the results were not alarming.

Revised Q4 GDP: Downward Adjustment Leaves Modest Growth

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