Economy in Brief

German industrial production had revived in the last two months, rising by 2.1% month-to-month in February after rising by 1.3% in January. December production had fallen by 2% month-to-month. The upshot is that the 12-month growth rate for production is still showing a decline of 4.8%; over six months, the change in production shows a gain of 0.4% at an annual rate, while over three months, it moves up to 5.6% at an annual rate - quite a strong pace. Overall production in the quarter-to-date is rising at a 5% annual rate. Taking a much more distant benchmark, we compare the level of output today to what it was in January 2020 before COVID struck and find it's still lower by 8%. This is very definitely a short-term revival as the longer-term trends are still weak. The chart explores the year-over-year growth rates by sector for German output.

Output by sector Output by sector shows gains in each sector in February and gains in two of three sectors in January, the exception being capital goods where a 1.5% gain in February is compared to a 1.5% drop in January. All three sectors, consumer goods, capital goods, and intermediate goods show declines in December. The sequential growth rates that compare the annual rate of growth over 12 months to six months to three months find consumer goods output ramping up at an extremely strong pace from -1.8% over 12 months to a 21% annual rate over three months. Capital goods output shows some improvement, but it then runs out of gas; capital goods output is down at a 7.6% annual rate over 12 months; that's reduced to 4.5% annual rate drop over six months but then worsens ever-so-slightly to a 4.9% drop over three months. Intermediate goods get back on-theme with sequential acceleration in output, progressing from a -4.6% growth rate over 12 months, to a +6.5% annual rate over three months.

Orders, sales, PMI Manufacturing output, orders, and real sales showed increases in February, but both sales and orders declined sharply in January, after having increased in December. Manufacturing output is up for two months in a row. Germany's manufacturing PMI rose in January, but it sank back in February. Manufacturing output is accelerating. Real manufacturing orders are also showing a steady progress higher, although all of their growth rates are still negative. Meanwhile, real sales show contractions over three months, six months and 12 months; the three-month and six-month contractions are larger than the 12-month contraction. The bottom line is that manufacturing output falls into line showing sequential gains, but orders show declines amid sequential improvement, and the real sales lag behind those other gauges.

Other surveys of Manufacturing and Industry Other manufacturing surveys tell a mixed tale of the last three months. The ZEW survey shows conditions worsening from December, in January and February. The IFO manufacturing gauge shows slight improvements on that timeline; IFO manufacturing expectations also show a slight step up. However, the EU Commission's industry survey shows a progression of deeper weakness. Viewed sequentially, the ZEW survey shows steady erosion from 12-months to six-months with most of that 12- to 6-month deterioration still in-place over three months. The IFO manufacturing gauge weakens sequentially as does the IFO manufacturing expectations reading. The EU Commission index weakens progressively from 12-months to six-months to three-months.

IP in other Europe Industrial gauges elsewhere in Europe are up to date for Portugal, Spain, France, and Norway. Each of them shows an increase in February compared to January. However, each of those countries also shows a decrease month-to-month in January compared to December. And in December, half of the countries show declines and half of them show increases month-to-month. The experience across Europe obviously has been uneven. Sequential growth rates for industrial production also are uneven. Portugal has an uneven pattern. Spain shows acceleration along with Norway. There is a deteriorating pattern for France. Once again it's a mixed bag of results so we're unable to characterize Europe as doing anything as a whole. European economies still seem to be responding according to their individual circumstances. In the table, of course, Germany, Portugal, Spain, and France are all European Monetary Union members while Norway is not- but even among the monetary union members, we're not seeing the same patterns.

Q-T-D Quarter-to-date (QTD), Germany shows strong results with overall production rising 5% at an annual rate and only capital goods showing a decline on a Q-T-D basis. Portugal shows a Q-T-D gain in output of 7.4% annualized. Spain logs 13.7% with Norway showing a 1.5% gain. France shows a decline in industrial production on Q-T-D basis with a -3% annual rate reported.

The Post-Covid wrap-up Post-COVID has been a difficult time for Germany and for Europe. Industrial production in Germany is lower by 8% compared to January 2020 and all the sectors are lower. Manufacturing output in Germany is lower; real manufacturing orders and real sales are lower as well. The indicators from ZEW, the two from the IFO and the EU Commission survey all are lower compared to the January 2020 values. Industrial production across Europe is weaker compared to January 2020 except for Spain showing industrial production stronger by 2.3%. Norway is weaker by only 0.8%, fairly close to unchanged on that timeline.

In this week's letter, we look at a few more macroeconomic themes relating to Asia. We first analyse recent Asian currency performance, noting the Japanese yen’s weakness and the Indian rupee’s relative resilience in the face of a strengthening US dollar. We then examine the explanatory power of yield differentials for the respective performance of these currencies. We find that while yield differentials explain about half of the currencies’ returns variability, much remained unaccounted for, particularly in the case of the yen.

We move next to study more localized issues within specific Asian economies. Starting with Japan, we discuss the recent slowdown in the growth of its monetary base and in its central bank’s government bond holdings in light of monetary policy moves. We also examine Japan’s latest Tankan survey results, which indicate diminished large manufacturer optimism, but elevated sentiment amongst large non-manufacturers. Moving to China, we take stock of developments in its electric vehicle market and investigate possible drivers of its recent sales slump, including seasonality and increased competition. Lastly, we explore South Korea’s latest exports numbers in the context of its broader relevance for global trade. We find that while headline export growth remains positive, underlying weakness exists when semiconductors – a major export component – is removed.

Asian FX performance The US dollar has been on the front foot lately, with its strength spurred in part by some unwinding of Fed rate cut expectations. The strengthening has come to the detriment of Asian currencies, which have weakened on average by 3.5% against the dollar so far this year (Chart 1). The extent of Asian currency depreciation against the dollar has been varied, however, with the Japanese yen having weakened the most, while the Indian rupee has displayed relative resilience.

The monthly view: The S&P composite PMIs in March show some continuing but slow improvement. The average for the 24 countries listed on the table moves up to 52.4 in March from 52.0 in February and 51.5 in January. The median moves up to 52.7 in March from 51.3 in February and 50.7 in January. Both the mean and the median progressions show ongoing improvement. Statistical agreement is a beautiful thing. The number of jurisdictions showing composite PMI values below 50 numbered 11 in January, fell to 9 in February, and to six in March. Fewer countries listed in this table are showing overall declining economic activity. In addition to that, few are showing a slowing tendency. Month-to-month changes show only 40% were slowing in January, only 32% were slowing in February, and only 44% of the reporters slowed in March compared to February. The monthly changes are constructive but not dramatic.

Sequential profile: The sequential changes look at 12-month, to six-month, to three-month changes; they show that averages have risen from 51.6 for the overall, to 51.3 over six months - slightly weaker- and then advancing to 52.0 over three months. The median over 12 months is 51.7, that slips to 50.7 over six months and recovers to 51.8 over three months, just slightly above the 12-month average. Neither the average nor the median shows a steady progression towards improvement, but both show a slightly better reading over three months than over 12 months although the margins of improvement are small. The number of jurisdictions showing declining activity over 12 months is 8, that moves up to 10 over six months and down to 7 over three months. The number of jurisdictions growing slower was over half for 12-months and six-months; over 12 months at 65% slower, and even higher proportion of 78.3% showed slowing over six months compared to 12 months. Over three months, the proportion slowing pulls back sharply to only 34.8%. We see in these trends both the tendency for the PMI to show fewer declines and for the breadth of weakness to pull back over the past year.

Queue standing- These improvements have had an impact on the queue standings as well. The average queue standing is now at 53.8% with the median at 55.1%. The medians for the composite PMIs are above 50% which means they're above their median values over the last four years. Out of the 24 reporters, only 11 jurisdictions show PMI standings below 50 which means below their median.

The Weakest vs. the Strongest- The weakest standings in the table in March are standings in the 20th -percentile. Qatar, for example, registers a 20.4 percentile standing. Nigeria is at a 24.5 percentile standing. Germany has a 28.6 percentile standing, with France at a 30.6 percentile standing. The European Monetary Union has a 46.9 percentile standing. The United States has a 42.9 percentile standing. These data suggest that the improvement is not being driven by the large-developed economies. The highest percentile standing in the table belongs to India at the 98th percentile. Brazil has an 81.6 percentile standing. UAE reports an 87.8 percentile standing. Singapore has a 75.5 percentile standing and Japan notches a 73.5 percentile standing.