Economy in Brief

In this week’s letter, we focus on political uncertainty and its potential risks to economic growth. We begin with Japan, where the long-ruling Liberal Democratic Party (LDP) faced a significant electoral setback last weekend, losing its ability to form a majority in the lower house, even with its coalition partner's support. This development has sparked a period of political flux, complicating efforts to predict Japan's policy trajectory. Market reactions have partially reflected these concerns (Chart 1), though responses to the Bank of Japan's decision to maintain its current policy settings have been muted (Chart 2), which is understandable given that the outcome was largely anticipated.

The uncertainty surrounding elections extends to the United States, where the presidential race between Donald Trump and Kamala Harris remains too close to call by many measures. Observers are particularly interested in how the election results might impact relations with China. US-China relations have been the focus of various trade-related measures by the US over the past decade, including tariffs and product controls (Chart 3). However, it's worth noting that the US's hawkish stance on China may well persist regardless of the incoming president. On a more optimistic note, expectations for China’s near-term growth have improved (Chart 4), bolstered by a recent series of easing measures from its authorities. Nevertheless, uncertainty lingers regarding the economy's ability to achieve its 5% growth target for the year.

Finally, we examine developments in other advanced Asian economies, where industrial production growth has shown signs of easing in recent months (Chart 5). We discuss the potential implications of continued declines in this growth on exports and, consequently, on the growth rate of these economies, many of which rely heavily on exports as a primary growth driver (Chart 6).

Japan’s lower house elections and the October BoJ meeting Japan’s ruling party, the Liberal Democratic Party (LDP), experienced a significant electoral upset last weekend, losing its majority in the lower house of Parliament. Even with the support of its coalition partner, Komeito, the LDP is now unable to form a majority. This shift puts Prime Minister Ishiba's position at risk, as he may need to seek support from parties outside his usual allies to advance his policy agenda if he remains in office. Given this uncertainty, political maneuvering is expected to intensify in the coming weeks, with a special parliamentary session scheduled for November 11 to elect Japan’s next Prime Minister. In response to the initial news, the yen weakened further, reflecting market concerns, while equities saw a slight uptick (Chart 1).

On the month, 7 of 18 countries reported weaker manufacturing PMI results than they had the month before. However, the median on a month-to-month basis didn't change at all. Sequentially looking at averages over 12 months, six months and three months, we see the median hasn't changed very much across that span either. It has stayed just below the value of 50, which indicates unchanged output, oscillating between values of 49.6 and 49.7. That's a great deal of consistency for these averages over these three different multi-month segments. All this as global trade growth has come to a halt according to the Baltic trade volume index.

The bottom line is that there isn't really a lot of trend in these overall data and the conditions of economic weakness remain in force although it's weakness of the mildest sort, technically below the value of 50 but - for the most part – these are numeric figures that would round up to a value of 50!

The queue percentile standings show that among these 18 observations, only 6 have values above their historic medians; that would refer to any queue percentile standing value of about 50%. The average percentile standing across all 18 reporting units is at 48.6, again fairly close to breakeven; however, the median value is only at 36.8% - the median is significantly weaker than the average.

As a group, the strongest reporters are the ‘BRIC’ reporters, with queue percentile standings at 54.4% for China, 35.1% for Russia, 73.7% for India, and 61.4% for Brazil. The weakest reporters in the table are Turkey at a 7% standing, France at a 17.5 percentile standing and Indonesia and a 19.3 percentile standing.

Looking at changes since January 2020 when COVID began to emerge, ten of the 18 reporters have even weaker values today than they had in January 2020 while the strongest reporters are Russia 2.7 points higher, India 2.2 points higher, and Brazil 1.9 points higher. No other country has a gain relative to January 2020 any stronger than 0.7 points.

Looking at the breadth of improvement, 66.7% improving compared to where they were 12-months ago; we see 38.9% improving over six months compared to over 12 months and 27.8% improving over three months compared to six months ago. This trend is unnerving, showing smaller, and smaller, proportions of reporters that are doing better than they had been doing over the previous period. And this is not good news even though the diffusion median value hasn't changed very much nor have the various period averages.

Unemployment remains low in the euro area in September. It is tied for its all-time record low since the union was formed. So, the ranking of the rate is in its 0.3-percentile that says it has been this low or lower only 0.3% of the time. That is much lower than for any EMU member in the table. The lowest ranking (highest standing) in the table is Italy at 1.6% followed by Ireland at 7.4%. The reason the EMU rate ranks so much lower is that it is the confluence of all these low unemployment rates that is unusual making the EMU-wide rate even lower.

Trends The sequential trends from 12-month to 6-months to 3-months shows five of 12 countries in the table with falling rates of unemployment. Only four show unemployment falling on balance over six months with one having unemployment unchanged. Five have unemployment unchanged over three months as well. This shows the trend for unemployment rate to fall is still in place and that may seem surprising given the weakness in some of the recent economic data from Europe. Of course, one reason for this is also that Europe’s large economy Germany has its unemployment rate rising over 12 months and six months and it is on a different trend that the EMU area- that seems unsustainable.

Over the most recent three months, we see the unemployment rate falls in six countries month-to-month in August compared to only three in September. September has five countries with the unemployment rate rising that compares to only three in August.

The labor market trends may be running out of gas as far as lowing the unemployment rate is concerned. Still, the ECB is still cutting rates to provide economic support. But the labor trend does not show decay sequentially. The annualized monthly drops are all in the same ballpark for 12-month, 6-month, and 3-month changes. But the situation with Germany needs to be resolved since it will be hard for the euro area to perform well if Germany can’t.