Economy in Brief

The EMU trade surplus rose in September to €13.5b from €10.8b in August. However, the average surplus size has been shrinking as the 12-month average is €14.9b, the 6-Mo average is €13.9b, and the 3-Mo average is €12.4bl. The September surplus has risen above its 3-month average but does not seem to be part of a trend.

The table chronicles the gradual erosion in the trade surplus on manufacturing trade from 12-mo to 6-mo to 3-mo. On the same timeline the deficits on non-manufacturing trade in EMU has become only slightly smaller partly offsetting the effect of the shrinking manufacturing surpluses on the overall trade picture.

Export trade trends for total trade as well as for Manufacturing and nonmanufacturing viewed separately show no clear trend on the 12-Mo to 6-Mo to 3-Mo timeline.

Import trends show overall acceleration that is supported by both accelerating manufacturing imports and non-manufacturing imports.

The Euro-Area trade data are for net flows in and out of the whole area with intra-regional trade netted out. The EMU area is showing an acceleration in imports that suggests a strengthening in demand. However, the area’s exports are not picking up in step. These trends are not borne out in the month-to-month changes but are fully reflected in the sequential averages.

However, it is too soon to view Europe as in recovery or out of the woods based on some strength in imports. While the sequence of import growth rates improves steadily over shorter periods, the more reliable year-on-year rate of growth for imports still register declines for overall imports driven by more extreme weakness in non-manufacturing imports.

While exports are not trending to stronger growth, at least export flows appear to be stable with positive growth rates for the most part. Manufacturing exports gain 1.2% over 12-months and rise at a 0.8% annual rate over three-months. The nominal growth is slow and is indicating only slow decay in real terms.

Country level data are, of course, of a very different quality, since these data are by the reporting country and will include as ‘exports’ goods sent anywhere outside that country’s borders which will include exports within the Euro-Area itself. On this basis German exports and imports are declining and decelerating. France shows exports steadily accelerating with imports not trending but clearly declining on all horizons. The UK, a non-EMU/NonEU country, shows exports reviving from a steep negative 12-month growth rate to show strong gains over three months. Meanwhile, UK imports also recover from steep year-on-year declines to post a more neutral result over three-months. On the export side alone Finland shows exports growing on all horizons while Portugal and Belgium show export growth turning negative over shorter horizons.

On balance, EMU and European trends are mixed. There is some hint of stabilization on the import side, but that trend development is new and not echoed by year-over-year strength. Germany and France, the two largest EMU economies, both show consistently weak imports. There is precious little good news in the September trade report from EMU.

In this week’s letter, we focus on China. The Chinese economy has shown early signs of a pickup in recent weeks, following a series of easing measures. However, these signs do not yet suggest a full-scale economic rebound, and observers remain uncertain about whether the economy will meet its 5% growth target for the year. We also explore China’s latest debt swap program for local governments, which many see as a positive step. Nonetheless, some are underwhelmed by the scale of the RMB 10 trln program, which is small compared to the estimated size of local governments’ "hidden debt". In addition, we address broader structural issues likely to continue as points of contention between China and other major economies, and most notably the US. Issues include China’s persistent current account surplus and concerns about its overcapacity. We examine the potential impacts of this overcapacity, from its detrimental effect on domestic industries in receiving economies to the deflationary pressures from Chinese exports. Additionally, we touch on the financial flows resulting from China’s export revenues. Finally, we end on a more positive note, highlighting China’s progress in its green energy transition, with some forecasters predicting that China will reach peak carbon emissions within the next year or two.

Recent developments The Chinese economy has picked up pace in recent months, following a series of easing measures introduced by authorities. These measures include interest rate cuts, relaxed property restrictions, and, more recently, a debt swap program for local governments. Of particular note is the official manufacturing PMI, which has returned to expansionary territory (Chart 1) for the first time in six months. More broadly, the economic surprises from China have shifted back to more neutral levels, following a period of disappointing results. However, while there are encouraging signs of a turnaround, these developments do not yet point to a full-scale economic rebound.

Industrial production in the United Kingdom fell by 1% in September after rising by 1.3% in August and falling by 1.3% in July, continuing a choppy pattern. In September output declined for capital goods, for intermediate goods, and for consumer nondurable goods with consumer durable goods output unchanged on the month. This bevy of declines followed monthly output increases across all sectors in August which followed output declines in all sectors in July. The monthly output trends have had all this stability of a car suspension on a cobblestone road.

Beyond the monthly gyrations sequential output trends show output getting progressively weaker. Manufacturing output falls by 0.7% over 12-months; it declines at a 2.4% annual rate over six-months and then accelerates that decline to a 3.9% annual rate drop over three-months. However, output does not get sequentially weaker across all of the sectors; it only weakens sequentially for intermediate goods output. However, of the 12-sequential sector calculations (across 4 sectors and three periods) all of the observations are negative except three. The bottom line is that the overall trend shows output declines are becoming steeper, and the sector level observations show that output is broadly declining across sectors.

The September figure ends, data for the third quarter; in that quarter (to date) output managed to increase by 0.8% at an annual rate with increases in all of the sectors except capital goods where output fell in the third quarter at a 1.7% annual rate.

Looking at some key industry details, we see quarter-to-date declines or flat performance at all industries in the table except for food, drink, & tobacco where there's a 1.8% annual rate increase in the third quarter.

The UK remains in a troubled spot and although the Bank of England has started to reduce interest rates, it has done it in an environment where inflation is not entirely behaving and perhaps this is because of the observation that economic growth is so weak and the belief that with growth this week inflation excesses will not be able to persist. Weak manufacturing is a global phenomenon. The UK does not set itself apart from the countries of the G7 by posting weak industrial results. It is unclear when there will be a turn-around in global manufacturing. The US economy that often leads business cycles is showing some signs of doing better, but its manufacturing data have not turned around partly because its economy has been hit by a significant strike and by a series of hurricanes that have interrupted the good sector of the economy. The outlook remains unclear and marred by ongoing geopolitical tensions with governments staffed by new participants all around.