Economy in Brief

The large industrial companies that form the most important vanguard readings for this report are the weakest in the first quarter with manufacturing backtracking to reading of +12 from +14 in the fourth quarter. That +12 reading is below its four-quarter average of +13.0. Large nonmanufacturing firms, however, stepped up with a reading of +35 in the first quarter up from +33 in the fourth quarter to the highest standing since the third quarter of 2006, which is the period over which we rank these data. The large manufacturing bellwether reading has a 66.7 percentile standing, while the total industry reading is static at +23 for the first quarter with the percentile standing and its 97th percentile.

The outlook for large manufacturing companies also stepped back to +12 in the second quarter from +13 in the first quarter. Its four-quarter average is +13.3 and that leaves it with the ranking at its 67th percentile quite similar to the current reading for the first quarter for manufacturing. Nonmanufacturing remained at a reading of +28 for the third quarter in a row; this is a second-quarter of 2025 reading; it's one-year average is +27.8 and at +28 this is also the highest outlook reading for nonmanufacturing on this timeline. The total industry reading has an outlook in the second quarter of +20.0, the same as the first quarter, down slightly from the fourth quarter; it compares to a four-quarter average of +20.3 and has a queue percentile standing in its 92nd percentile.

The outlook readings, for the most part, are firm-to-strong. Unfortunately, the manufacturing readings are the weakest; instead of being on their 90th percentile like the total industry and nonmanufacturing, manufacturing readings have 66th percentile standing which leaves them only at the lower border of the top third all readings since 2006.

Nonmanufacturing industries show the strongest readings with 90th percentile standings for transportation, restaurants & hotels, wholesaling, and services for businesses. Among the other reporting nonmanufacturing sectors, the standings are in their 80th percentiles or higher except for personal services that has a softer 70th percentile standing.

Compared to the period just before COVID, all sectors are higher except for services for businesses and personal services that are each one or two points lower than they were in the fourth quarter of 2019 before COVID struck. The strongest advances from the pre-COVID reading are from restaurants & hotels with the 35-point rise in their index, as well as retailing, and real estate each with 24-point increases in their respective indexes; wholesaling has a 22-point rise in its index. Large firm manufacturing overall has a 12-point rise in its index on that timeline while construction has an increase of only two points.

The responses for medium- and small-sized firms are not considered to be harbingers in this survey, but for manufacturing both medium- and small-sized firms have rankings in their low 80th percentile while the nonmanufacturing rankings have standing in their 97th and 98th percentile. However, the outlook for medium- and small-sized firms carry percentile standing in their 70th percentile for manufacturing. There still are readings with rankings in the high 90th percentiles for the nonmanufacturing sector that continues to be quite strong across Japan regardless of the size of the firm reporting

This week, we turn our focus to India in the context of US President Trump’s upcoming “Liberation Day” tariff announcements on April 2. Investors are likely on edge, uncertain about the specifics of Trump’s proposed “reciprocal” tariffs. However, early indications suggest that initial concerns may have been overstated, with significant impacts likely limited to only a handful of economies. As we noted in our previous letter, India could be among the most exposed in Asia to these tariffs, given its relatively high tariff rates (chart 1) and specifically those on imports from the US. Beyond tariffs, India also maintains comparatively high non-tariff trade barriers—both in contrast to the US and its more trade-liberal Asian peers (chart 2). Despite these concerns, India’s financial markets have demonstrated strong performance lately. The Indian rupee has staged a strong recovery from earlier selloffs, while equities have rallied (chart 3). The rupee’s resurgence may be partly driven by seasonal flows, whereas equities appear to have benefited from a sharp rebound in foreign portfolio inflows (chart 4). Looking at longer-term structural challenges, one area where India has yet to fully capitalize is its workforce. Despite a relatively young population, a significant portion remains unemployed (chart 5). A closer examination reveals several contributing factors, including insufficient job creation, a persistent skills mismatch, and, more fundamentally, the need for improved access to basic education (chart 6), among other challenges.

US “reciprocal” tariffs As discussed in last week’s economic letter, India is among the most exposed countries in Asia to US President Trump’s upcoming “reciprocal” tariffs, set to be unveiled later this week (April 2). This exposure stems from the fact that not only does the US run a significant trade deficit with India, but India also imposes comparatively high tariff rates on imports in general, and not just from the US, as shown in chart 1. While there are concerns about the potential impact of these tariffs, India has already begun trade deal talks with the US to mitigate the effects if they are implemented. It seems that Trump’s underlying strategy may be working: US-India trade talks are reportedly progressing well, with India considering tariff reductions or even eliminations on more than half of its imports from the US.

The Circumstances- The chart of the three largest EMU economies and their HICP inflation rates shows clearly that year-over-year trends and inflation in France have broken lower while Italy, that has long had the lowest inflation rate in the monetary union among the four largest economies, is on a mild uptrend. Germany has made a very small re-set as inflation has broken lower in the short-run, but German inflation year-on-year actually would still appear to be in a slight uptrend.

There is good news- Despite these broader views, there is some excitement over this month’s inflation statistics from Germany. German inflation has fallen by 0.2% in March after rising by only 0.1% in February and in January. The annual rate change for inflation in Germany over three months is -0.3% which compares to France at -2.1%. These are clearly good inflation developments for the two largest economies in the monetary union; however, Italian inflation over this period is at a 5.7% annual rate while Spain's inflation is at a 1.2% annual rate. Among the four largest monetary union economies, three of them have short-term inflation rates well inside of the ECB's targeted pace for the union as a whole; however, the picture is far from completely clear.

There are reasons to be cautions in digesting the ‘good news’ - Italy shows a clear acceleration for inflation from 2.2% over 12 months to 2.8% over 6 months to a pace of 5.7% over 3 months; that acceleration is uncomfortable. For Germany, the year-over-year inflation is in excess of the EMU-wide target at 2.5%, and still excessive at 2.6%, and accelerating slightly over six months, but then it breaks sharply lower over 3 months to that -0.3% pace. France has relatively clean results with a one way read on inflation. Over all horizons, inflation’s pace is below the 2% mark and decelerating to boot running at a 0.9% annual rate over 12 months, followed with a 0.2% annual rate over 6 months, and then clocking -2.1% at an annual rate over 3 months. Spain is a good example of the mixed situation for European inflation as over 12 months it's 2.3% pace is slightly above the 2% that the ECB seeks for its EMU-wide target; over six months Spanish inflation steps up to a 3.4% annual rate, clearly excessive on everyone's radar, but not really worrisome, then, over 3 months, Spanish inflation settles down to only 1.2% at an annual rate- highly copacetic.

The inflation overview: numbers and their trends- Summing up what we have here are three countries with 12-month inflation above the 2% pace. France is below it at 0.9%. We also have three countries with inflation above the 2% pace over 6 months with France as the exception again at only 0.2% over 6 months. In addition to that, two of the three countries show acceleration over 12 months compared to 12-months ago, and over 6 months compared to the 12-month pace, inflation accelerates in three of these four countries. It's possible to look at these data and find good news; however, it's also possible to look at these data and find that the news does not appear to be quite so good.

Beyond the headlines- Turning to the core inflation rates for Italy and Spain, we see that both of the core rates for those two countries are at 2% over 12 months within the ECB's desired parameters and a green light for any pending rate cut decisions. Italian core inflation runs at 1.9% over 6 months with Spanish core inflation at 1.7% over 6 months also acceptable paces to the ECB. Over 3 months the Italian core picks up to 2.4% annual rate while the Spanish score remains at 1.4% and as part of a decelerating process for Spanish core inflation from 12-months to 6-months to 3-months.

The EU commission's overall reading for the European Monetary Area unexpectedly eroded, dropping to 95.2 in March from 96.3 in February, leaving it also below its January 2025 level but above its December 2024 level. It may simply be too soon for this survey to reflect any of the changes going on in Europe. But very clearly a ramp up in military spending is planned and economic conditions in the monetary union and beyond are about to receive a significant boost. While that development might be simply too new to have gotten into the indexes as of March, it is still in train so curb your disappointment.

EMU in March by Sector March readings for the monetary union show the industrial sector unchanged at -11 from February but showing improvement compared to both the December and January readings. Consumer confidence slipped in March to -14.5 from -13.6 in February and it's below its January and December levels as well. Retailing slipped to -7 in March from -5 in February and it also is below its string of readings since December of last year. Construction spending at -3 posted the same reading it logged in February and in January and those were slight improvements from December. The services reading in March slipped to +2 from +5 in February and it is also below its reading of +6 in January.

Country Readings Country level data show readings for 18 of the monetary union members; of these 18, only 6 have percentile standings for overall indexes that are above their median (a ranking of 50%) calculated on data back to 1990. Only one of the four largest countries has a reading above its median and that's Spain at a standing at 51.4% Other large countries show much weaker readings with Germany at a 16-percentile standing, Italy at a 37-percentile standing, and France at a 37.5 percentile standing. Month-to-month changes show deterioration in nine of the 18 reporting countries. This compares to a deterioration in eight in February and compares to January when six weakened relative to December. It is a worsening trend but based on developments in military spending to shore up NATO. Europe supported defense systems must carry more of the load. This will imply stimulus across the board coming for the monetary union.