Economy in Brief

The January trade balance in the euro area surged sharply into a stronger surplus at €28.0 billion, up from €14.3 billion in December, doubling in one months’ time. The 12-month average for the trade balance is a surplus of €8.3 billion. The average over the previous three months is €19.3 billion.

A larger surplus; a smaller deficit The improvement comes about in January through two sources: one is the balance on manufacturing trade where the surplus rose to €47.75 billion from €37.8 billion in December. The average surplus over the last 12 months is €34.2 billion. The second source of improvement is the balance on nonmanufactured goods, a trade balance that is in deficit. That deficit got smaller in January at -€19.7 billion as it improved from -€23.5 billion in December. Over 12 months the average deficit on nonmanufacturing trade is -€25.9 billion. Month-to-month there's improvement on both the manufacturing and the nonmanufacturing balance of the €14 billion improvement, about €10 billion of it comes on the manufacturing side with the rest on the nonmanufacturing side. That occurs with the manufacturing surplus getting larger and the balance on nonmanufacturing goods showing a smaller deficit.

The story of trade improvement is told by clearly different trends for exports and for imports. If we divide exports and imports into manufactured and nonmanufactured goods (as we did in the description above), we do see some quite different growth rates; however, in both cases the trends work to produce an improved trade balance for the euro area.

Trade in Manufactures Manufactured goods show exports fluctuating around a slight increase or little-change, falling by 1.2% over 12 months, rising slightly over six months, then falling at a 2.1% annual rate over three- months. Compare this to manufacturing imports where imports fall 13.8% over 12 months, fall at a 20.1% annual rate over six months, and then fall at a 27% annual rate over three months. While exports are floundering and holding around the zero-growth mark, imports are clearly plunging on all horizons with the import growth rates getting weaker over more recent periods. These trends obviously lead to an improved trade performance as the trade balance moves into larger surplus on more or less unchanged manufacturing exports amid plunging manufacturing imports.

Trade in Nonmanufactures Turning to nonmanufacturing trade on the export side, we see exports growing and accelerating over the different horizons, from 4.4% over 12 months, to a gain at a 33% annual rate over six months, to an increase at a 53% annual rate over three months. Nonmanufacturing imports, on the other hand, show persistent declines, however, amid withering weakness. Nonmanufacturing imports fall by 23.9% over 12 months; that's reduced to a decline of only 0.3% at an annual rate over six months, although it rebounds to a decline of 12.2% annualized over three months. Nonmanufacturing imports are declining on all horizons as the tendency for decline diminishes over more recent periods; however, this effect is being swamped by exports where the exports of nonmanufacturing goods are growing and are growing more strongly over shorter periods.

The two largest EMU Nations Looking at the two largest economies in the European Monetary Union, we see German exports growing over 12 months, six months, and three months and growing stronger over those horizons. The same trend is true of French exports which grow on all horizons and grow stronger as well. German imports contract over all horizons and French imports contract over all horizons. We see reinforcing trends in both Germany and in France behind the overall Monetary Union trends.

The U.K. The U.K., a European economy that's not a member of the monetary union or the European Community, shows exports and imports both declining over 12 months and over six months, with both trade flows improving over three months and with exports being slightly stronger over three months.

Other EMU Exports Export trends for Finland, Portugal, and Belgium - all of them monetary union members - show different patterns. For Belgium, exports decline on all horizons and are weaker over three months than over 12 months. For Portugal, exports decline over 12 months but gain pace and rise over six months and over three months. In Finland, there are double-digit declines in exports over 12 months and six months, and roughly unchanged performance over three months.

In this week's newsletter, we examine the key takeaways from the National People's Congress (NPC) in China. Initially, we highlight the government's economic objectives for the year ahead, including for a real GDP growth of "around" 5% and an inflation rate of "around" 3%. Following this, we examine potential obstacles that could impede China's achievement of these targets, including persisting drags from China’s property sector and still-subdued domestic inflation. We move next to take stock of China’s latest hard data, which revealed consensus-beating growth in the manufacturing and retail sectors. We note, however, that any interim stabilization is likely still in nascent stages. Subsequently, we analyze China's ambitions for its labour market, taking into account underlying trends of rural migration and broader demographic challenges. Finally, we investigate China's budgetary strategies for the year, focusing on the government's deficit targets with a nod to its plans for increased special bond issuance. While many would agree that China could do more with fiscal policy given persisting domestic woes, the extent of government debt growth will likely draw continued concerns.

Growth The Chinese government has set a GDP growth target of “around 5%” for 2024, unchanged from its goal for last year. The Chinese economy managed to log real GDP growth of 5.2% in 2023, having just barely exceeded its modest target while grappling with a slew of challenges (chart 1). Namely, China has faced, and continues to face headwinds from a struggling property sector, elevated local government debt levels, and fragile consumer confidence, among others. Also, recent official PMI data reveal a widening divergence between China’s manufacturing and non-manufacturing sectors. Specifically, the PMIs indicate ongoing, albeit mild, contractions in China’s manufacturing sector while the non-manufacturing sector has seen an accelerated pace of expansion.

A cacophony of trends and readings for Japan Japan's surveys for January show broad weakening despite an improvement in the METI service sector reading that rose for the second month in a row. Readings are varied, but they oscillate in a range of moderation to weakness. There is scant evidence of any strength across sectors in these various surveys using different methods of assessment and over various sectors or industries.

The Teikoku construction index improved month-to-month in January. The economy watchers index showed an improvement in employment and in its future index. For the economy watchers survey, those are three improvements in a row for employment and for the futures index. However, there's more weakening going on in January than there is strengthening.

The METI sector indexes showed industry weakening to a 97.6 reading in January from 105.5 in December. The Teikoku indexes show weakening month-to-month in services, wholesaling, retailing, and manufacturing, while in December, retailing, wholesaling, and services had improved monthly. In the economy watchers index, there was weakness in the headline and the retail sector; eating & drinking establishments and services sector readings also eased in January but all four of those surveys came after improvements in December- the economy watchers index itself had increased in each of the two previous months.

The emerging picture for Japan, therefore, is one with mixed performance across the surveys. We can also evaluate these statistics by looking at the growth rankings; for example, the year-over-year ranking of growth rates for indexes or for diffusion levels. The economy watcher diffusion indexes’ growth rates are above historic medians, except for the retail sector, which has a 44-percentile ranking. However, the rankings are not very robust with the highest being the future index with the 65-percentile ranking. The economy watchers index itself has only a 51.7 percentile growth ranking. The ranking on the levels of economy watchers diffusion indexes are higher in the 70th to 80th percentile range except for employment, whose diffusion level standing is below its historic median at its 48.3 percentile.

The Teikoku indexes also are diffusion indexes. We evaluate them on their year-over-year growth first; manufacturing and wholesaling both have growth rankings below their historic medians. The other components have rankings in their mid to low 60th percentiles. If we rank these diffusion indexes on their levels, the manufacturing index has only a 39.5 percentile standing; the rest of the sectors have standings that are in their 60th percentile decile-the exception is construction which is at its 55.8 percentile.