Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051024c.jpg" width="353">
Business confidence in France has been improving since June of this year when the balance of opinion on the general outlook registered 24% more pessimists than optimists. According to data released today by the French Institute of Statistics and Economic Studies (INSEE), the excess of pessimists over optimists regarding the outlook among businessmen has declined to only 1% in October. Over the past five years, business opinion on the outlook has tended to be more pessimistic and more volatile than business opinion of actual trends in production as can be seen in the first chart. The various components of the overall view are shown in the table below.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051024b.jpg" width="353">
INSEE also publishes a composite indicator of business confidence. It is based on the balances of opinions on past production, personal production forecasts, inventories, total and foreign order book and demand and general production forecasts and is constructed in such a way that the series has an average of 100 and a standard deviation of 10. According to this measure, business confidence weakened from mid 2004 to April and May of this year and is currently improving. Since late 2001, however, French business confidence has been subdued, ranging much closer to the average than in the past, as can be seen in the second chart.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/FRANCE/@F09/@F09.HTM">French Business Confidence Indicators (% Balance)</a></th>
<th scope="col">Oct 05&nbsp;</th>
<th scope="col">Sep 05</th>
<th scope="col">Oct 04</th>
<th scope="col">M/M Dif</th>
<th scope="col">Y/Y Dif</th>
<th scope="col">2004 &nbsp; </th>
<th scope="col">2003 &nbsp;</th>
<th scope="col">2002&nbsp;&nbsp;</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">General Outlook</td>
<td>-1</td>
<td>-13</td>
<td>23</td>
<td>12</td>
<td>-24</td>
<td>5</td>
<td>-29</td>
<td>-22</td>
</tr>
<tr>
<td class="firstcol">Recent Production Trend</td>
<td>4</td>
<td>4</td>
<td>17</td>
<td>0</td>
<td>-13</td>
<td>12</td>
<td>-8</td>
<td>-8</td>
</tr>
<tr class="odd">
<td class="firstcol">Order Book and Demand</td>
<td>-14</td>
<td>-19</td>
<td>-12</td>
<td>5</td>
<td>-2</td>
<td>-15</td>
<td>-23</td>
<td>-18</td>
</tr>
<tr>
<td class="firstcol">Foreign Order Book and Demand</td>
<td>-8</td>
<td>-12</td>
<td>-8</td>
<td>4</td>
<td>0</td>
<td>-11</td>
<td>-20</td>
<td>-17</td>
</tr>
<tr class="odd">
<td class="firstcol">Inventories</td>
<td>13</td>
<td>13</td>
<td>6</td>
<td>0</td>
<td>7</td>
<td>8</td>
<td>10</td>
<td>13</td>
</tr>
<tr>
<td class="firstcol">Prices</td>
<td>-4</td>
<td>2</td>
<td>2</td>
<td>-6</td>
<td>-6</td>
<td>1</td>
<td>-7</td>
<td>-5</td>
</tr>
<tr class="odd">
<td class="firstcol">Composite Synthetic Indicator*</td>
<td>102</td>
<td>100</td>
<td>108</td>
<td>2.0%</td>
<td>-5.6%</td>
<td>105</td>
<td>95</td>
<td>97</td>
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Business confidence in France has been improving since June of this year when the balance of opinion on the general outlook registered 24% more pessimists than optimists. According to data released today by the French Institute of [...]

Some Improvement in French Business Confidence

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Tian Yong Woon

This week we focus on South Korea, where ongoing political uncertainty continues to weigh on the economy. The Korean won remains under pressure, and equities are struggling to mount a meaningful recovery (Chart 1). The political instability has also dampened both consumer and business sentiment (Chart 2), posing a risk to economic activity if the situation persists or worsens. Focusing on the manufacturing sector, recent PMI readings indicate that the economy has struggled to maintain expansion, suggesting that factors beyond political instability, including external pressures, have been contributing to the challenges (Chart 3). Despite these headwinds, the Bank of Korea (BoK) opted to hold interest rates steady last week, pausing its easing cycle for now, despite the aforementioned economic constraints (Chart 4). A closer look reveals both domestic and external factors likely influenced the BoK’s decision. Domestically, the interim political flux has certainly played a role. Externally, considerations include more muted market expectations of Fed rate cuts this year (Chart 5) and potential trade-related actions from the newly re-elected Trump administration (Chart 6).

**Impacts of recent political developments**
Political uncertainty continues to weigh heavily on South Korean financial markets, with the won remaining on the back foot after being the worst-performing Asian currency last year. The South Korean won has weakened significantly in recent months, particularly against the US dollar (Chart 1), depreciating by around 11% since early October. While the broader impact of a strengthening dollar has contributed to this decline, the won has been especially impacted by domestic political turmoil, notably following President Yoon's short-lived declaration of martial law last December. Although the currency saw some temporary relief after Yoon's impeachment and arrest, it has yet to mount a substantial recovery, reflecting ongoing instability in South Korea’s political landscape. Meanwhile, equities are still struggling to recover from last year's losses.  For context, Yoon declared martial law in early December of last year, accusing the main opposition party of engaging in "anti-state activities" and collaborating with "North Korean communists." This drastic decision followed months of Yoon's deep unpopularity, which some political commentators believe contributed to the opposition party's landslide victory in the parliamentary elections earlier that year. However, Yoon quickly rescinded the declaration just hours after it was made, following its overwhelming rejection by lawmakers and widespread public protests.


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The dampened sentiment surrounding South Korea is reflected not only in financial markets but also in recent business and consumer sentiment surveys, which have plunged amid political turmoil. Specifically, consumer sentiment dropped by over 12 index points in December 2024, marking the first negative sentiment reading in more than six months (Chart 2). Business sentiment also declined, though to a lesser degree, dipping further into negative sentiment territory during the period. While not yet fully reflected in hard economic data, sentiment indicators like those discussed above can often influence actual economic behaviour. As such, South Korea’s ongoing political instability risks adversely affecting economic activity, especially if it persists.

250120T2.jpg

Turning to other survey results, South Korea's latest PMI readings also showed deterioration in December. Specifically, the manufacturing sector slipped back into contraction, driven by declines in both output and new orders (Chart 3). However, it is important to note that South Korea’s manufacturing sector, as indicated by the PMI, has struggled to stay in expansionary territory for several months, suggesting that factors beyond recent political instability have been at play. In particular, external factors have been weighing on the manufacturing sector, a theme we will explore further below.

250120T3.jpg

**The Bank of Korea**
The Bank of Korea (BoK) surprised investors last week by keeping its policy rates unchanged, effectively pausing its easing cycle for now (Chart 4). This decision, taken despite the sentiment-dampening developments outlined earlier, is justifiable for two key reasons. First, on the external front, the BoK sought to avoid exacerbating downward pressure on the won, which could have been triggered by a widening of yield differentials had it opted for further rate cuts. Second, its cautious, wait-and-see approach amid ongoing domestic political uncertainty, allows the central bank to make more informed decisions once the political landscape stabilizes. However, one could argue that withholding further monetary easing could leave struggling sectors without the support they need. Given the ongoing uncertainties, the BoK has also indicated that South Korea’s GDP growth is likely to fall below its November forecasts of 2.2% for 2024 and 1.9% for 2025.

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Delving deeper into the external considerations mentioned earlier, the BoK has had to contend with a strengthening US dollar as markets increasingly scaled back expectations of further US Fed easing this year. The reduction in Fed rate cut expectations has pushed US yields significantly higher since his electoral victory last year (Chart 5). This, in turn, has made US yield differentials with other economies, including South Korea, less favourable. As a result, investor demand for the US dollar has increased, leading to sell-offs of other currencies, including the won. It is likely that the BoK took these yield differential considerations into account when deciding to hold its policy rate last week.

250120T5.jpg

Considerations regarding Fed policy are likely not the only concerns South Korea faces from the US. The potential direct impact of trade-related actions by US President Trump’s administration is also a significant worry. This is especially true given Trump’s hawkish stance on trade and his goal of reducing the US trade deficit through tariff-related measures. In this context, South Korea has particular reason for concern, as it recorded the 8th largest trade deficit with the US in 2023. This is concerning because exports have been a key driver—often the main driver—of South Korea’s recent GDP growth. Notably, the US has increasingly accounted for a larger share of South Korea’s exports, reaching just over 18% in 2024. In response, South Korean authorities have already begun considering measures, such as purchasing more oil and gas from the US, to help reduce the trade surplus with the US. However, it remains to be seen whether these actions will be enough to significantly reduce the surplus and avoid potential US countermeasures.

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Asia

Economic Letter from Asia: On Korea

Winnie Tapasanun

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Industrial production (IP) rose a larger-than-expected 0.9% m/m (0.5% y/y) in December following an upwardly revised 0.2% increase in November (-0.1% initially) and a downwardly revised 0.5% decline in October (-0.4% previously), data from the Federal Reserve Board showed. A 0.3% m/m December increase had been expected in the Action Economics Forecast Survey. The December IP index at 103.2 was the highest since June 2024; it was 4.2% above a low of 99.0 in September 2021 and 8.1% above a low of 95.5 in February 2021. The Fed estimated that increases in aircraft & parts output contributed 0.2 percentage point to December IP growth after the resolution of the Boeing strike. In Q4 2024, IP fell 0.2% q/q after falling 0.2% q/q in Q3 2024, dropping at a 0.6% annualized rate following a 0.8% Q3 annualized rate of decline. IP fell 0.3% in 2024 after rising 0.2% in 2023 and 3.4% in 2022.

By **industry groups**, manufacturing production gained 0.6% (0.03% y/y) in December following an upwardly revised 0.4% increase in November (+0.2% initially) and two consecutive m/m declines. Durable goods production rose 0.4% (-1.2% y/y) in December following a 0.9% rebound in November. This reflected m/m output rises of 6.3% (-5.6% y/y) in aerospace & miscellaneous transportation equipment, 1.7% (-1.9% y/y) in primary metals, 0.9% (-0.4% y/y) in fabricated metal products, and 0.5% (3.0% y/y) in electrical equipment, appliances & components. Notably, aircraft & parts production climbed 11.4% (-9.2% y/y), the largest m/m gain since May 2020, following a 0.7% November rebound. In contrast, the following durable goods categories fell m/m in December, including output drops of 2.0% (-3.7% y/y) in furniture & related products, 1.0% (-4.9% y/y) in miscellaneous durables goods, 0.7% (+3.8% y/y) in computer & electronic products, 0.6% (-5.7% y/y) in motor vehicles & parts, 0.6% (-1.3% y/y) in nonmetallic mineral products, 0.2% (+0.7% y/y) in machinery, and 0.2% (+2.7% y/y) in wood products.

Nondurable goods production rose 0.7% (1.4% y/y) in December after edging up 0.1% in November and October. The December rise reflected m/m output increases of all nondurable goods categories, including 1.6% (1.2% y/y) in petroleum & coal products, 1.5% (5.5% y/y) in printing & related support activities, 1.2% (-7.2% y/y) in apparel & leather goods, 0.8% (5.4% y/y) in chemicals, 0.6% (-1.0% y/y) in food, beverages & tobacco, 0.3% (1.3% y/y) in paper, 0.2% (-4.2% y/y) in plastics & rubber products, and 0.1% (2.3% y/y) in textiles & product mills.

Mining activity rose 1.8% (0.3% y/y) in December following an upwardly revised 0.5% decline in November (-0.9% initially). Utilities output rose 2.1% (4.3% y/y) following an upwardly revised 0.7% November drop (-1.3% initially). They increased for the second time in three months.

By **market groups**, business equipment output rose 1.4% (-4.3% y/y) in December following a 1.4% rise in November and two successive m/m decreases. Materials production advanced 1.2% (1.4% y/y) after virtually unchanged. Construction supplies production increased 0.9% (0.9% y/y) after holding steady. Consumer goods output rose 0.5% (0.3% y/y) in December after a 0.5% rebound, reflecting a 0.4% decline (-5.3% y/y) in durable consumer goods and a 0.7% gain (1.9% y/y) in nondurable consumer goods.

In **special classifications**, factory output of selected high-tech industries rose 1.1% (7.9% y/y) in December after holding steady in November (+0.3% initially) and four straight m/m rises. Manufacturing production excluding selected high-tech industries grew 0.6% (-0.2% y/y) following a 0.4% November rebound and two consecutive m/m declines. Manufacturing production excluding selected high-tech and motor vehicles & parts rose 0.7% (0.3% y/y) after a 0.2% November increase and three straight m/m decreases.

Capacity utilization rose to 77.6% in December, the highest since August, after holding at 77.0% in November (76.8% initially). The Action Economics Forecast Survey forecasted 77.0%. The December reading was 2.1 percentage points below its long-run (1972–2023) average. Manufacturing capacity utilization rose to 76.6% in December, the highest since September, from 76.2% in November (76.0% initially); the December rate was 1.7 percentage points below its long-run average.

Industrial production and capacity data are in Haver’s **USECON** database. Additional detail on production and capacity utilization can be found in the **IP** database. The expectations figures come from the **AS1REPNA** database.

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- Dec. IP +0.9% m/m (+0.5% y/y), up for the second straight month; IP Index at a 6-month high.
- Mfg. IP +0.6% m/m, w/ durable goods up 0.4% and nondurable goods up 0.7%.
- Mining activity +1.8% and utilities output +2.1%, up for the second month in three.
- Key categories in market groups all gain.
- Capacity utilization increases to a 4-month-high 77.6%.

U.S. Industrial Production Exceeds Expectations in December

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Total housing starts jumped 15.8% m/m to a higher-than-expected 1.499 million units at a seasonally adjusted annual rate (SAAR) in December after declines of 3.7% to 1.294 million in November (-1.8% m/m, 1.289 million initially) and 0.8% to 1.344 million in October (-3.2% m/m, 1.312 million previously), data from the U.S. Census Bureau showed. The Action Economics Forecast Survey had expected 1.320 million starts for December. The December reading was the first m/m rise since August and the highest level since February 2024. The year-on-year rate was at -4.4% in December, the smallest y/y decline since September and less severe than -14.3% in November; it was +17.0% y/y in December 2023. Starts were 18.0% below a recent peak of 1.828 million in April 2022. During all of 2024, housing starts fell 4.0% after falling 8.4% in 2023 and 3.3% in 2022.

Single-family starts rose 3.3% (-2.6% y/y) to 1.050 million in December on top of a 7.7% rise to 1.016 million in November (1.011 million initially), registering the fourth m/m rise in five months and the highest level since February 2024. They reached a high of 1.222 million in November 2021 and a high of 1.286 in December 2020. Multi-family starts surged 61.5% (-8.4% y/y) to 449,000, the highest level since December 2023, reversing a 30.7% November decrease to 278,000. They reached a high of 624,000 units in November 2022 and a high of 627,000 units in April 2022.

Housing starts gained in all the major regions except in the West. Starts in the Northeast jumped 40.2% (22.7% y/y) to a three-month-high 157,000 in December, the third m/m increase in four months, after a 2.8% rebound in November. Starts in the Midwest recovered 20.0% (1.0% y/y) to 204,000, up for the second month in three, following a 32.5% November slump. Starts in the South advanced 17.7% (0.1% y/y) to 853,000, the highest level since February 2024, following a 10.2% November rise and two consecutive m/m declines. To the downside, starts in the West fell 0.7% (-26.2% y/y) to 285,000 on top of an 11.7% decrease, registering the third m/m fall in four months and the lowest level since July 2024. Notably, the South continued to post the largest level figure (853,000) for housing starts among the four regions. It showed a peak of 1.048 million in April 2022.

Building permits slid 0.7% (-3.1% y/y) to 1.483 million in December, the third m/m slide in four months, following a 5.2% rise to 1.493 million in November (compared to 1.493 million recently revised on December 23 and 1.505 million initially reported on December 18). They reached a high of 1.915 million in January 2022 and a high of 1.883 million in January 2021. Single-family permits rose 1.6% (-2.5% y/y) to 992,000, the third straight m/m rise and the highest level since February 2024, after a 0.5% increase to 976,000. They reached a high of 1.251 million in January 2022 and a high of 1.250 in January 2021. Multi-family permits fell 5.0% (-4.3% y/y) to 491,000, down for the third month in four, after having recovered 15.4% to 517,000. They reached a peak of 813,000 units in February 2023 and a high of 799,000 units in June 2022.

The housing starts and permits figures can be found in Haver's **USECON** database. The expectations figure is contained in the **AS1REPNA** database.

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- Housing starts +15.8% (-4.4% y/y) to 1.499 mil. in Dec. vs. -3.7% (-14.3% y/y) to 1.294 mil. in Nov.
- Single-family starts highest since Feb. ’24; multi-family starts highest since Dec. ’23.
- Housing starts up m/m and y/y in the Northeast, Midwest and South but down in the West.
- Building permits fall for the third month in four, due to a drop in multi-family permits.

U.S. Housing Starts Rebound in December; Highest Level Since February 2024

Robert Brusca

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U.K. sales volume for retail sales has been slipping roughly since mid-2024. The 3-month volume index is falling at a 4.4% annual rate over three months. Sales are up at a scant 0.2% annual rate over six months and by 3.5% year-over-year. Passenger car registrations show weakness falling at a 7.6% annual rate over three months, gaining at a 4.6% pave over six months, and then showing contraction at a minor -0.1% rate over 12 months.

**Volume Trends**
Apart from the sequential data, the monthly volume results show a decline in December, a gain in November and a drop in October. The monthly nominal data show small nominal gain in November and December against a sharper nominal decline in October.

U.K. nominal sales QTD relative nominal decline in the fourth quarter with retail sales volumes also show decline dropping at a 2.9% annual rate overall. Passenger car registrations are falling at a 12.4% annual rate in the fourth quarter.

**Surveys and Confidence**
U.K. surveys on retailing for the ‘time of year’ and the ‘volume of orders’ from the Confederation of British Industry (CBI) show sputtering monthly results. The CBI reading for time of year (TOY) and volume of orders (VoO) both show net decline of three months. VoO also falls over six months whereas TOY sales are higher over six months. Both TOY and VoO sales are higher over 12 months. TOY sales are up by 2-index points while VoO sales are up by 28 of their index points. While the year-on-year survey results show short-term agreement, their year-on-year signals seem different. But their long-term ranking results alone again show similarity at the TOY sales log a 21.8 percentile standing vs. VoO that is even weaker at a14-percentile mark. It is an even weaker full-sample standing despite the better 12-month gain. We often see this sort of thing in data comparisons. But if surveys are well-constructed, they usually track but there often are still disparities. That is true here as well and we can nit-pick the details but the overarching message here is that conditions are weak. Consumer confidence from GfK has been volatile over the span but when we rank the confidence index, it stands at 40.5 percentile level, which is stronger than for the surveys but still below its median and barely over half the standing of real retail sales growth.

**Rankings/Standings**
The consumer confidence standing is interesting at 40.5% but it is not ‘close’ to the volume ranking which is at its 77-percentile. The confidence ranking is still slightly below its median. The retail sales ranking is applied to real sales and their 12-month growth rate. The ranking of sales volume is much higher than any ranking registered by CBI surveys or by consumer confidence. Passenger car registrations are weak, too, at a 47.2 percentile standing. In contrast, nominal retail sales have a 60.6 percentile standing. Part of that is the boost they get from the 80.9 percentile standing from the CPI-H, from inflation.

Some Improvement in French Business Confidence

Summary

Louise Curley

More Economy in Brief

Economic Letter from Asia: On Korea

U.S. Industrial Production Exceeds Expectations in December

U.S. Housing Starts Rebound in December; Highest Level Since February 2024

U.K. Retail Sales Volumes Slide

French Business Confidence Indicators (% Balance)	Oct 05	Sep 05	Oct 04	M/M Dif	Y/Y Dif	2004	2003	2002
General Outlook	-1	-13	23	12	-24	5	-29	-22
Recent Production Trend	4	4	17	0	-13	12	-8	-8
Order Book and Demand	-14	-19	-12	5	-2	-15	-23	-18
Foreign Order Book and Demand	-8	-12	-8	4	0	-11	-20	-17
Inventories	13	13	6	0	7	8	10	13
Prices	-4	2	2	-6	-6	1	-7	-5
Composite Synthetic Indicator*	102	100	108	2.0%	-5.6%	105	95	97