Economy in Brief

German industrial production was strong in January and February but March brough a setback as IP slipped back by 0.4% month-to-month. In March, month-to-month IP fell in all major IP categories except capital goods where it edged ahead by 0.1%.

Sequential trends Sequentially, German IP shows signs of life and of acceleration. The month’s small setback has not reversed that, but since it is an early setback in a process of recovery that is long overdue there is some skepticism about whether the rebound will be sustained. Persisting acceleration is exhibited in the headlines and in all three key sectors. Still, the year-on-year change shows a net drop for the headline and all components. Capital goods still show net output declines on all horizons.

Trends year-on-year Year-on-year consumer goods trends (see data plot) show a somewhat sharper move upward in growth rates while intermediate goods show a slow crawl higher – in both cases this means slower year-on-year declines in train. Capital goods trends show less recovery with only a recent bounce from a deep, 6.2% year-on-year decline, logged in January of this year.

Quarter-to-date The QTD trends show strong gains across components and for the IP headline – the exception is capital goods where output is still falling at a 6.3% annual rate, even with all this pickup in activity around it. The failure of capital goods to join the rebound parade is another reason to remain cautious about embracing the notion of the sustainability of the rebound.

Other IP assessments There is a column of queue standings that rank the year-on-year growth rate on annual data over the last 24 years. This ranking produces a standing in the 14.5 percentile for IP overall and sector standings that rank from 39% to 11%. Next, evaluating IP gains from before Covid in January 2020 to date, leaves us with an empty house. There are no net gains! All sectors show the level of IP in March 2024 -a hearty four-year period – containing some major and minor cycles, a sucker punch from Covid and the Russian attack on Ukraine – at lower levels. German industrial output overall and across sectors is weaker on balance and with unclear momentum. Statistically the momentum looks good right now, but it still must show its sustainability.

Other German manufacturing metrics Manufacturing output on its own follows the same script as for overall IP. However- ominously- real manufacturing orders do not. They show the opposite case, an implosion of sequential growth rates culminating in a drop at a nearly 40% annual rate over three months. Real sales also show a steady diet of declines without much trend but with their weakest reading over the more recent period. The queue standings of the annual growth rates are low.

German surveys The monthly survey results are a mixed bag of monthly trends. The sequential averages, however, show a trend to deterioration of all four industrial metrics, save one (IFO manufacturing). QTD the survey results are split. The queue standings of the surveys are uniformly weak in the ranking range of 10-15-percentile…quite weak.

Other Europe MFG IP Other Europe presents a split view. Monthly data for the four European nations in the table are mixed. Trends from 12-month to 6-month to 3-month are showing acceleration for Spain and Portugal vs. a clear trend to deceleration in France. Norway, a non-EMU country, shows unclear trends but only exhibits an output decline over 12 months. However, the IP standings for the four European nations in the table all are superior to Germany’s. Germany traditionally is the European powerhouse on this metric. Remember this is an individual ranking metric; it does not rank countries against one another. Germany’s own ranking is 14.5%, Spain’s own ranking is 77.7%, France and Portugal have mid 40-perentile rankings, while Norway has a 37-percentile ranking. Comparing each to its own normal performance over the last 24 years, all countries are doing better than Germany. Not surprisingly, German output has fallen by 8.7% since January 2020 compared to a net 4.6% drop for France, a net 2.8% drop for Portugal, a net 0.9% drop for Norway, and an 8.1% rise for Spain. Europe is not operating as it has in traditionally normal times. Covid and the Russian invasion have turned Europe on its head…and it is still there, despite some early signs Germany may be mounting a recovery.

Real German orders fell by 0.4% month-to-month in March after falling by 0.8% month-to-month in February. These two declines followed a much larger 10.9% drop in real orders posted in January of this year. Foreign orders in March rose by 2% after falling by 2.2% in February and falling by 10.8% in January. Domestic orders were basically on that same roller coaster, falling by 3.6% month-to-month in March after rising 1% in February and falling by 10.9% month-to-month in January. January was a tough month for German orders no matter where you look; since January, there hasn't been any recovery in German orders.

Sequential Real Orders But the sharp drop in orders in January, just three months ago, sets the stage for the three-month annual rate in orders to decline sharply; it falls at a nearly 40% annual rate compared to a 5.9% annual rate decline over six months and a 1.7% decline over 12 months. Foreign orders and domestic orders show similar progressions as you can see in the table. With the extra drop over three months, it does not make much sense to dwell on whether the declining pattern is sequentially enabled or not.

Real Sales Real sales by sector are less affected by whatever machinations are buffeting orders. Sales across categories fell in March after posting a full slate of monthly gains in February. That followed a near-full-slate of declines in January, with consumer nondurables an exception to the weakness and one that showed enough strength to boost overall consumer goods sales to a gain as well. Sequentially real sector sales show declines on all horizons, a series that barely escapes showing progressive weakness but annualized sales over three months are weaker than sales over 12 months.

Q1 Assessment March completes the orders and sales data for the first quarter; that finds orders falling at an 11.3% annual rate with similar drops for both domestic and foreign orders. Real sector sales in the quarter fall at a 1.8% annual rate on declines across categories except over all consumer sales and consumer nondurable goods sales.

In this week's letter, we examine recent developments in China. We first take a pulse on the economy, with a nod to its consensus-beating real GDP performance in Q1. We note, however, some signs of weakening momentum, and, most notably, some disappointing industrial and retail sales readings seen for March. As such, it remains to be seen if the economy is conclusively out of the woods, especially when pockets of weakness remain. We analyze next some trends in China’s tourism space, which has seen a pickup in international air travel volumes, likely boding well for tourism-reliant economies in Asia. We then investigate export trends in the broader Asian region in relation to China. Here, we notice a mixed landscape: while some economies like Japan have reduced their export dependence on China, others, such as Vietnam, are seeking deeper economic integration. Lastly, we delve into shifts in cross-currency relationships, observing a decline in the correlation between yuan-yen and yuan-baht returns, among other notable trends.

We deduce from the recent developments that China’s recovery, whilst still underway, remains uneven and not yet set in stone. Nonetheless, China’s tourism sector continues to strengthen, initially in domestic travel and more recently in international trips. Moreover, beneath the interim recovery lies shifts in economic relationships with other Asian economies, relating to both export dependence and to currency moves.

China’s recent economic results China continues to be focal point for global investors, given its potential impacts on the world economy. The domestic economy posted better than expected real GDP results for Q1, with growth accelerating to 5.3% y/y during the period. The impulse came from net exports, which contributed to growth for the first time in six quarters. Looking at China’s March data, however, we saw rather disappointing results from its industrial and retail sector as growth rates slowed towards the end of the quarter (Chart 1). Hence, while China’s January and February figures offered some hope of economic stabilization, its more recent dataflow for March now raise concerns about weakening momentum.

April readings for the S&P total or composite PMI survey show mixed performance in April with more countries showing deterioration month-to-month than showing improvement, but with the average reading in April higher than the average reading in March. That makes it a bit of a standoff in terms of trying to assess the performance of the survey. More countries are doing worse but on average countries are doing better.

These tendencies are provided without any weighting for the country’s GDP size; that's another caveat. Looking at the United States, the European Monetary Union, and the EMU’s four largest members as though they are all separate and independent observations (which they are not) shows two worsening was in April with the same relative results in March; February shows only one worsening and five improving. Those are certainly good statistics and good news since these are large economies carrying a large weight in terms of their contribution to world output.

In Asia, Japan, and China show different performance with China improving month-to-month in February, March, and April but with Japan worsening month-to-month in April and February but improving in March.

Turning to sequential data that look at averages and changes over three months, six months and 12 months, we find the highly developed European and the U.S. readings all improving over three months; however, four of six of those readings deteriorate over six months compared to 12 months. Three deteriorate and three improve on balance over 12 months compared to the average ending 12 months ago.

We also assess the performance of these countries by looking at their PMIs in a queue of ranked data since January 2020. In that queue, Italy and Spain have 70th percentile standings, above their historic medians (medians occur at a ranking of 50%) along with the European Monetary Union with a 53.1 percentile ranking. However, the United States has a 36.7 percentile ranking, Germany, a 40.8 percentile ranking, and France, a 46.9 percentile ranking; that leaves us with three readings above their median and three below for the full period assessment.

Over the entire sample, the averages from February to March to April cluster in a very tight range from 52.0 to 52.5; the median lies in a range of 51.3 to 52.7. Over those three months, there are 4 of the countries in the survey below a reading of 50 which means they're contracting in April. Six are contracting, in March and six are contracting in February. The averaged data show improvements from three-, six-, and 12-months. On those metrics, nine countries contract over three months, 11 contract over six months, and 11 contract over 12 months.

Turning to statistics on acceleration, we find that 52% of countries are slowing in April but only 44% in March and only 32% in February. The averages are fairly stable; there are deteriorating circumstances in terms of the proportion of countries showing readings below the month before and on a month-to-month basis. Looking at the sequential data for three months compared to six-months, six months compared to 12 months, and 12 months compared to 12-months ago, the percentage of countries slowing steadily diminishes from nearly 70% over 12 months to 56.5% over six months to 30.4% over three months. The broad picture shows less slowing while the monthly picture shows that there may be more slowing creeping into the process.

The average queue standing, which positions these countries in their queue of data since January 2020, is at 51.6%. Across our sample of 25 countries, 12 of them show readings below their respective 50th percentile rankings. This gives us a sense that across the sample based on the ranking data and the average of the PMI data statistics are hovering close to the median for the period. However, this is comparison over a four-year period that has seen a good deal of contraction in play.