Louise Curley

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Business sentiment in Germany continued to improve in March from the very low level reached in December. The ZEW indicator of market sentiment regarding the economic outlook for the next six months rose to 17.7%, that is, the percentage of those with a positive outlook exceeded those with a negative outlook by 17.7%. The ZEW measure is often a precursor of the widely watched IFO indicator of business sentiment, as can be seen in the attached chart
In addition to tracking economic sentiment, the ZEW market survey also tracks the opinions of analysts and institutional investors regarding the outlook for stock and bonds. The balance of opinion between optimists and pessimists regarding financial markets is traditionally small. Over the past twenty years, the range of opinion on stocks was 9% to -1% and for bonds, 7.5% to -7.5%. In March, 2003, the indicator rose to 6.2% for stocks and declined to -4.1% for bonds. So far this year, opinions regarding the stock market outlook have remained optimistic while those regarding the bond market outlook have deteriorated.

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<th scope="col" class="firstcol">Balance of Opinions</th>
<th scope="col"></th>
<th scope="col"></th>
<th scope="col"></th>
<th scope="col"></th>
<th scope="col">% Chg</th>
<th scope="col"></th>
<th scope="col"></th>
<th scope="col"></th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol"></td>
<td>Mar</td>
<td>Feb</td>
<td>Jan</td>
<td>Dec&nbsp;</td>
<td></td>
<td>2002</td>
<td>2001</td>
<td>2000</td>
</tr>
<tr>
<td class="firstcol">ZEW</td>
<td>17.7</td>
<td>15.0</td>
<td>14.0</td>
<td>0.6</td>
<td>ZEW</td>
<td>42.5</td>
<td>-56.3</td>
<td>10.0</td>
</tr>
<tr class="odd">
<td class="firstcol">IFO</td>
<td>n.a.</td>
<td>87.3</td>
<td>87.4</td>
<td>85.9</td>
<td>IFO</td>
<td>-0.9</td>
<td>-9.5</td>
<td>6.0</td>
</tr>
<tr>
<td class="firstcol"></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Stocks</td>
<td>6.2</td>
<td>5.7</td>
<td>6.0</td>
<td>6.1</td>
<td>Stocks</td>
<td>-0.2</td>
<td>1.0</td>
<td>-0.9</td>
</tr>
<tr>
<td class="firstcol">Bonds</td>
<td>-4.1</td>
<td>-3.3</td>
<td>-2.9</td>
<td>-1.9</td>
<td>Bonds</td>
<td>-4.6</td>
<td>3.1</td>
<td>1.4</td>
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Business sentiment in Germany continued to improve in March from the very low level reached in December. The ZEW indicator of market sentiment regarding the economic outlook for the next six months rose to 17.7%, that is, the [...]

Business Sentiment in Germany: The Economy, Stock and Bonds

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Kathleen Stephansen, CBE

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The Producer Price Index for final demand rose 0.2% (3.3% y/y) in December, following an increase of 0.4% (3.0% y/y) during November, according to the Bureau of Labor Statistics (BLS). The December monthly reading compared to a 0.4% rise expected in the Action Economics Forecast Survey. Producer prices excluding food, energy & trade services edged 0.1% higher (3.3% y/y) following a similar monthly rise (3.5% y/y) in November. The PPI excluding food & energy was unchanged (3.5% y/y) in December after rising 0.2% (3.5% y/y) in November. The BLS reported that on an unadjusted basis, prices for final demand increased 3.3% in 2024 after moving up 1.1% in 2023, while prices for final demand excluding food, energy & trade services rose 3.3% in 2024 following a 2.7% advance in 2023.

Final demand food prices eased 0.1% (4.7% y/y) in December, following a rise of 2.9% (4.9% y/y) in November, revised from a rise of 3.1% (4.9% y/y). Prices for fresh and dry vegetables declined by 14.7% (+21.3% y/y), while egg prices rose 0.5% (127.9% y/y) after a surge of 55.6% over the month in November.

Energy prices increased 3.5% (-2.0% y/y) during December, after holding steady (-6.1% y/y) in November, revised from a rise of 0.2% (-6.2% y/y). Gasoline costs rose 9.7% (-2.5% y/y) while home heating oil prices rose 4.0% (-12.6% y/y). Electric power prices rose 1.0% (1.8% y/y) and natural gas costs gained 0.7% (2.2% y/y). Diesel fuel dropped 1.3% (-13.9% y/y).

Final demand goods prices excluding food & energy were unchanged over the month (2.1% y/y) during December, following a rise of 0.2% (2.2% y/y) in November. Core finished consumer goods prices increased 0.1% (2.4% y/y) after a rise of 0.3% (2.3% y/y) in November. The increase in core nondurable goods prices rose 0.1% (2.9% y/y) last month after a rise of 0.4% (2.9% y/y) in November. Durable consumer goods prices rose 0.2% (1.6% y/y) in December following a rise of 0.1% (1.3% y/y) in November. Capital equipment prices rose 0.2% (2.8% y/y) last month following a similar monthly rise (2.7% y/y) in November. Core government-purchased goods prices edged 0.1% higher (2.1% y/y) in December, after similar monthly and year-on-year rises in November.

Final demand services prices were unchanged (4.0% y/y) in December after rising 0.3% (3.9% y/y) in November. Trade services prices eased 0.1% (+4.4% y/y) last month following a rise of 0.7% (3.2% y/y). Trade of finished goods prices were unchanged (3.8% y/y) in December, after rising 0.6% (2.8% y/y) in November. Prices for final demand transportation and warehousing services rose 2.2% (2.1% y/y) last month, after falling 0.6% (-0.3% y/y) in November. Services prices less these costs fell 0.2% (+4.1% y/y) last month, after a rise of 0.2% (4.7% y/y) in November.

Construction costs rose 0.2% (1.7% y/y) in December, after holding steady (+1.6% y/y) during November.

Prices for intermediate demand of processed goods rose 0.3% (0.2% y/y) in December after holding steady (-0.6% y/y) in November. Processed energy goods prices rose 1.6% last month after easing 1.2% in November, while food prices rose 0.4% following a 0.8% advance in November.

The PPI data are published by the Bureau of Labor Statistics and can be found in Haver’s **USECON** database. Further detail is contained in **PPI** and **PPIR**. The expectations figures are available in the **AS1REPNA** database.

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- Overall index rise softer than expected.
- Advance in core goods prices is steady.
- Advance in services price is steady.

U.S. PPI and Core PPI Gains Ease in December

Winnie Tapasanun

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The NFIB Small Business Optimism Index rose to 105.1 in December, the eighth m/m rise in nine months and the highest level since October 2018, after an 8.0-point rise to 101.7 in November, according to the Small Business Economic Trends survey conducted by the National Federation of Independent Business. This was the second straight month that the index was above the 51-year average of 98. The index, up from its recent low of 88.5 in March 2024 and 91.9 in December 2023, was also above a high of 102.5 in June 2021 and a high of 104.0 in October 2020. Seven of the 10 index components rose, two fell, and one was unchanged. The NFIB Small Business Uncertainty Index declined to 86 in December, the lowest level since June 2024, from 98 in November; however, it was well above its recent low of 65 in November 2023 and a low of 55 in June 2022.

The outlook for business conditions in the next six months remained positive for the second consecutive month in the latest survey. The net balance of respondents expecting the economy to improve jumped to 52% in December, the seventh m/m rise in eight months and the highest level since March 2002, on top of a 41-point surge to 36% in November; it was significantly above a record low of -61% in June 2022. Expected real sales rose to a net 22% in December after an 18-point gain to 14% in November, posting the second successive positive reading and the highest level since January 2020. The latest reading was up from a low of -21% in May 2023 and a low of -29% in July 2022. A net -13% of respondents reported higher nominal sales in the past three months, unchanged from November and registering the highest reading since June 2024. The latest reading, however, was below the most recent positive reading of 1% in May 2022 and a peak of 9% in June 2021.

Plans to make capital outlays dipped to 27% in December following a six-point increase to 28% in November. These numbers were up from a low of 19% in September 2024 and a low of 19% in April 2023 but down from a high of 31% in October 2021. Plans to expand the business rose to 20% in December after an eight-point rise to 14% in November; the latest figure, up from a low of 2% in March 2023, registered the best reading since February 2020. Meanwhile, expected credit conditions increased to -2% in December, the highest reading since February 2020, from -5% in November; these readings were above a low of -11% in November 2023.

On the labor front, labor markets remained relatively tight. Forty-nine percent of respondents reported that qualified workers to fill job openings were hard to find in December, slightly up from 48% in November. These numbers were below a high of 57% in September 2023, a high of 61% in May 2022, and a peak of 62% in September 2021. A net 19% planned to increase employment in December, slightly up from 18% in November, but it was down from a high of 26% in May 2022 and a peak of 32% in August 2021. Notably, 35% reported positions not able to be filled in December, slightly down from 36% in November; these figures remained below a high of 51% in May 2022.

Overall earnings trends had remained in negative territory since December 2019. The figure was held at -26% in December and November, still a poor reading, following a one-point increase to -33% in October; these readings were below a high of -18% in March 2023 and a high of -5% in June 2021.

On the pricing front, inflation pressures, while trending down, remained at an inflationary level. The net percent raising their average selling prices held at 24% in December and November after a one-point easing to 21% in October; these numbers were slightly down from 25% in December 2023 and well below a high of 66% in March 2022. The percentage planning to raise prices registered at 28% in December and November following a one-point increase to 26% in October; these figures were below 32% in December 2023 and a high of 52% in March 2022.

Wage inflation, while relatively high, eased somewhat in the December survey. A net 29% of respondents raised compensation during the last three months, down from 32% reported in the November survey and registering the lowest reading since March 2021. It was down from a high of 46% in February 2023 and a peak of 50% in January 2022. A net 24% of firms planned to raise worker compensation in the next three months, down from an 11-month-high 28% reported in November; these numbers remained below a high of 30% in November 2023 and a high of 32% in October 2022.

Inflation continued to be an issue facing small businesses, as reported by 20% of NFIB members in December as the single most important problem. The December figure was unchanged from November and down from and a peak of 37% in July 2022. The quality of labor was the second important concern with 19% in December, unchanged from in November. Other concerns (in December vs. November) included taxes (15% vs. 14%), the cost of labor (11% vs 11%), and government requirements (8% vs. 8%).

According to the Small Business Administration, there are 33 million small businesses in the United States, which employ 62 million workers. The NFIB surveys anywhere from 500 to 2000 respondents each month and the typical firm employs 10 people and reports gross sales of about $500,000 a year. The NFIB figures can be found in Haver’s **SURVEYS** database.

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- December NFIB Small Business Optimism Index up 3.4 pts. to 105.1.
- Uncertainty Index down 12 pts. to a six-month-low 86.
- Expectations for economy up 16 pts. to 52%, the highest since March 2002.
- Expected real sales up 8 pts. to 22%, the highest since January 2020.
- Inflation (20%) remains top business problem, followed by Quality of Labor (19%); both unchanged from November.

U.S. NFIB Small Business Optimism Rises Again in December; Highest Level Since October 2018

Robert Brusca

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The OECD seven-country LEI rose in December and is gaining at an annual rate of 1.1% over three months, up marginally from a pace of 0.9% over six months and doubling its growth rate over 12 months. Still, all of these are modest numbers. Japan’s LEI was flat in December and shows LEI declines over three months, six months and 12-months. The U.S. shows a gain of 0.2% in December with a 1.8% annual rate rise over three months, a 1.3% pace over six months and the same 0.5% gain year-over-year as for the OECD7. The index levels show an OECD7 queue standing in its 66.8 percentile, the U.S. a tad stronger at its 68.2 percentile and Japan much weaker and below tis median pace at a 36-percentile standing.

The OECD likes to judge these indicators over six months. So, I construct six-month averages, and we see the same 0.4% U.S. and OECD7 gains on this average for its change month-to-month in December and November for both. Japan turns up flat in December on this metric and shows declines over three months and 12 months. In contrast, China shows declines on this averaged gauge in December and in November but shows growing momentum from 12-months to 6-months to 3-months. The 6-month growth rate show strength in the rankings for the U.S., China, and the OECD7. But Japan also sputters in terms of growth rates on 6-month changes with a 36-percentile standing.

The amplitude adjusted metrics show only France persistently with a reading below 100 - but Japan walks the line. The ratio to six months ago shows only Japan and Germany weakening. The queue standings show only Japan and Germany, with readings below their respective medians (values below 50%).

The OECD data are not very reassuring. While conditions show basic advancing trends, they are advancing slowly with little evidence of strength. The U.S. has the strongest standing on OECD index levels and growth rates, and they are largely in the 68th and 81st percentile ranges. Germany and Japan sport 36-percentile standings for their LEI index levels on amplitude adjusted readings. These are very weak reading for two important economies.

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OECD LEIS Creep Ahead

Tian Yong Woon

In our first economic letter of the year, we focus on China. Despite positive economic surprises in recent months (Chart 1) and growth now on track to meet the “around 5%” target, China’s recovery remains uneven and subject to downside risk. In response, China’s authorities have rolled out more fiscal and monetary easing measures (Chart 2), broadening both their scale and their scope. However, some observers continue to question whether these measures will be effective, particularly in addressing deeper structural issues.

Amid expectations of low interest rates and concerns about a deflationary spiral, investors have bought more Chinese bonds, driving yields to record lows (Chart 3). The continued decline in bond yields prompted the authorities to intervene on Friday and halt further bond purchases. Looking ahead, China faces several challenges, with US trade policy, in particular, a key concern (Chart 4).

Ahead of potential US trade actions, producers and importers have taken precautionary steps, boosting supplies, and thereby driving China’s export growth in recent months (Chart 5). Nonetheless, export prices have continued to decline, and the yuan has weakened further. Against this backdrop there will be much interest in this week’s upcoming data releases, including the highly anticipated Q4 GDP report (Chart 6).

**Recent developments**
Although there have been some positive developments, lingering macroeconomic challenges persist. On the one hand, the extent of economic surprises in China, as shown in Chart 1, remains largely positive, with a flurry of positive surprises late last year. On the other hand, concerns in sectors like the property market continue to weigh on the economy. Moreover, the pace of China’s economic recovery remains uneven across sectors, as reflected in the latest PMI readings. The manufacturing sector shows only mild expansions, while the non-manufacturing sector continues to grow at a faster pace. Nonetheless, President Xi has recently stated that China is on track to meet its growth target of "around 5%" for 2024. China’s real GDP growth has certainly stayed close to the 5% target, narrowly missing it with a 4.8% year-over-year growth in Q3.

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China’s authorities have pledged continued support for the economy. On the fiscal front, leaders have committed to increasing the budget deficit to 4% of GDP while maintaining a growth target of "around 5%", thereby providing more room for expenditure. Additionally, authorities have reportedly agreed to significantly increase special bond issuance to 3 trillion yuan ($409 billion) in 2025, setting a new annual record. To further stimulate consumption, the government announced an expansion of the home appliance trade-in subsidy program, increasing the eligible items from eight to twelve. Additionally, millions of government workers received pay raises, boosting their disposable income and potentially driving greater consumption. On the monetary side, the People’s Bank of China (PBoC) has reaffirmed its "moderately loose" policy stance, promising to further reduce the reserve requirement ratio and interest rates, though the timing of these moves remains unclear. While these measures signal a clear intent to support the economy, some observers argue that they may not be sufficient to spark a robust recovery. Others, however, believe that the cautious approach is appropriate given the current circumstances.

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The recent rally in China’s bond markets appears to be fuelled by expectations of continued monetary easing and concerns over a potential deflationary spiral, among other factors. Investors have stepped up their purchases of Chinese bonds, driving yields to record lows, with the 10-year government bond yield at one point falling below 1.6%, as shown in Chart 3. This stands in contrast to the US, where government bond yields have risen due to a market reassessment of Fed rate cuts and expectations surrounding President-elect Trump’s policies. China's December CPI reading, which dropped to a nine-month low of just 0.1% year-on-year, has further heightened concerns of deflation. These factors have reignited fears of a potential "Japanification" of China, drawing parallels to the 1990s when Japan experienced leverage, persistently low inflation (and often deflation) as well as weak consumption.

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**Looming headwinds, anticipatory moves**
Adding to China’s challenges are potential actions from incoming US President Trump, who has maintained a hawkish stance on China as America’s economic rival. At the core of Trump’s position is his dissatisfaction with China’s large and persistent current account surplus with the US, primarily driven by trade (Chart 4), and concerns about its impact on the US economy. Additional worries focus on China’s overcapacity, which has supported export growth, and the extensive use of state subsidies that were perceived to have harmed US industries. As a result, Trump’s proposed solution—tariffs as high as 60% on Chinese exports to the US—could undermine one of China’s few remaining growth drivers, namely trade.

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Producers and importers of Chinese goods have taken proactive steps in response to expected headwinds, with exports growing by double digits in October and December ahead of Trump’s return to office. Despite this, export prices have continued to decline (Chart 5), a trend some attribute to ongoing overcapacity in China. In response to potential US tariff actions, producers have also taken steps such as reorganizing supply chains and outsourcing from other economies. On the currency side, the yuan, along with many other Asian currencies, has depreciated significantly against the US dollar, which has made Chinese exports cheaper. However, whether a weaker yuan can fully offset the impact of looming US tariffs on China remains uncertain.

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**Upcoming data**
Looking ahead to the coming week, China’s data releases will be pivotal for investors in shaping their views on the economy. Along with its usual monthly reports, including retail sales, industrial production, unemployment, and house prices, China will release the highly anticipated Q4 GDP data (Chart 6), providing greater clarity on the economy's performance in 2024. Analysts will be keen to assess whether the recent easing measures are beginning to yield positive effects. Additionally, attention will likely turn to domestic travel and spending patterns during the upcoming Chinese New Year holidays later in the month, as these may offer insights into consumer sentiment and spending behaviour in period ahead.

Business Sentiment in Germany: The Economy, Stock and Bonds

Summary

Louise Curley

More Economy in Brief

U.S. PPI and Core PPI Gains Ease in December

U.S. NFIB Small Business Optimism Rises Again in December; Highest Level Since October 2018

OECD LEIS Creep Ahead

Economic Letter From Asia: On China

Balance of Opinions					% Chg
	Mar	Feb	Jan	Dec		2002	2001	2000
ZEW	17.7	15.0	14.0	0.6	ZEW	42.5	-56.3	10.0
IFO	n.a.	87.3	87.4	85.9	IFO	-0.9	-9.5	6.0

Stocks	6.2	5.7	6.0	6.1	Stocks	-0.2	1.0	-0.9
Bonds	-4.1	-3.3	-2.9	-1.9	Bonds	-4.6	3.1	1.4