Economy in Brief

New Zealand’s CPI shows an acceleration in the fourth quarter of 2024 compared to the third quarter. The year-over-year increase is at a relatively modest 2.2%; however, the New Zealand core that excludes food and household energy as well as vehicle fuels is running at 3.1% over four quarters. The inflation progression for the core takes inflation down to 2.5% over two quarters then back up to a 2.9% annual rate over one quarter. The graph shows that the decline in the year-over-year core and headline inflation rates have stopped in this most recent quarter; that raises the question about where inflation goes next.

There is nothing final about the pause that we see in the drop in inflation. It might be a pause that then continues its downward move, or it might not. However, as you can see from the chart, taking away the big inflation hump that we had during COVID and extrapolating a trend line from before COVID inflation puts inflation on an accelerating path. In fact, inflation, whether measured by the headline or the core, shows both above those previous trends even if we set aside the bulge of inflation during COVID.

However, inflation news is resplendent for its ability to give us mixed signals! The more that we look at it, the more it stares back in confusion. If we look at the CPI categories, we see inflation acceleration is not common: over four quarters it's occurring in only 8% of the categories; over two-quarters it's occurring in 25% of the categories; over one quarter it's occurring in only 42% of the categories. Comparing inflation month-to-month, the accelerations are below 50% for the fourth quarter, the third quarter, and the second quarter. Second-quarter inflation breadth was especially narrow even though the headline increase was slightly more in Q2 than it was in Q3. Such is inflation.

Assessments and expectations This ZEW survey for January shows mixed results. The economic situations in the euro area, Germany, and the United States, as currently perceived, improved month-to-month while expectations in the U.S. were essentially unchanged and economic expectations for Germany deteriorated. The U.S. had the largest increase in the assessment of the current economic situation. The U.S. diffusion reading rose by 9.1 points, the German situation improved by 2.7, points and in the euro area it improved by 1.2 points.

Inflation expectations Inflation expectations rose in all three areas with the euro area seeing expectations rise by 9.1 points, Germany is seeing an increase of 9.7 points, and the U.S. experiencing an increase of 11.9 points. Given that, economic reports have been somewhat uneven, as you can see the assessment of the current situation has nonetheless improved. Along with that, inflation expectations are beginning to rise more or less across the board. Inflation is generally already above levels that central banks are targeting.

Interest rates- short-term expectations Short-term rate expectations rose in the euro area by 12.5 diffusion points and by a whopping 32.6 diffusion points in the United States. With the election of Trump and expectations that there will be tariffs imposed, and tax cuts extended, and pro-growth policies implemented, there is a decided turn to the expectation for higher inflation and for that to create knock on effects for higher short-term interest rates. At the last policy meeting, the Federal Reserve cut its policy rate; the Federal Reserve is still looking for rate cuts sometime later in the year even though it's not looking to get back down to its inflation target this year, creating a somewhat strange perspective on Fed policy. Policy continues its inflation overshoot; yet, it continues to cut interest rates. I suspect we're on the cusp of seeing that policy change, but it has not changed yet. Here we see the ZEW experts seem to be on board for that policy undergoing some substantial changes in the months ahead.

Long-term rate expectations Long-term rate expectations declined in Germany and in the U.S. and despite the outlook for somewhat higher inflation the outlook for higher short-term interest rates may be enough to mollify expectations on longer term rates and also may be a vote of confidence that central banks will do the right thing when inflation rises by raising short-term rates enough. This survey seems to conform the expectation to contain more distant inflation pressures and allow long-term rates to hold in.

Stock markets That view would be consistent with the stock market assessments that are lower in all three areas. In the euro area, the stock market assessment falls by 5.5 diffusion points; in Germany, it falls by 12.7 diffusion points; in the U.S., it falls by 1.8 diffusion points. That means that the ZEW financial experts are looking for stock market cap performance to back off despite better current economic conditions lowered expectations for Germany but not for the U.S. and in the midst of this expectation for higher inflation and substantially higher short-term interest rates as well. It's an interesting changing view from the ZEW experts and it paints a picture of the future that seems to be increasingly likely.

Queue standings U.S. queue standings- The table also includes the queue standings for the various measures in the top part of the table. There we see only the U.S. has queue standings for some measures that are above 50% placing them above their longer-term medians (above 50% standings). Those are for the economic situation, for economic expectations and for stock market expectations. U.S. inflation expectations, however, are getting higher at 43.8%, closing in on their historic median, while short-term rate expectations are still relatively low at 13.2% and the level of long-term expectations in the U.S. is at 17.3% also relatively low.

German queue standings- Germany has an economic situation at its the 4.9 percentile standing - extremely weak. Expectations are better with the 35.6 percentile standing with inflation at the 22.7 percentile standing. The euro area short-term rate expectations (EC) are at 5.8% and the German long-term rate expectation is at 8.2%; both of those are low. The expectation for the German stock market is extremely poor with the 1.9 percentile standing.

The euro area queue standings- Compared to Germany, the euro area has a 24.9 percentile standing for the current situation. Inflation expectations are at a 20.6 percentile standing, with short-term rate expectations at a 5.8 percentile standing and stock market expectations in the eurozone around 8% still quite low.

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.

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.