Economy in Brief

In this week's letter, we evaluate recent developments in Asia’ supply chains and trade. First, we analyze the consequences of ongoing disturbances in the Red Sea, observing a temporary reduction in freight and bunker fuel prices following their initial surges. Our discussion then turns to the potential effects of these developments on Asia, highlighting that supplier lead times have remained largely unaffected thus far. We further investigate the breakdown of geographical sources of imports for the region, pointing out that the predominance of intra-Asia trade could serve as a buffer against disruptions in sea routes elsewhere. We also expand our analysis to include a wider perspective on the semiconductor industry, recognizing Asia's contribution to the resurgence in global sales. Finally, we shed light on the varying growth rates of semiconductor exports among Asian countries.

Impacts of Red Sea disruptions so far The Baltic Dry Index (BDI), a composite of dry bulk shipping costs, surged to historic highs during the initial waves of Houthi attacks in early December (chart 1). That said, the index quickly normalized after sentiment stabilized and as shipment re-routings were underway. In contrast, the Drewry World Container Index (WCI), which captures shipping costs associated with eight major east-west routes, only surged in early January. The surge was driven by costs relating to routes that often require passage through the Red Sea (e.g., between Shanghai and western cities). Nonetheless, the WCI has already started to show signs of peaking, as prices moderated in early February.

Industrial production for French manufacturing rose 1.2% month-to-month in December after gaining 0.2% in November and being flat in October. The progression has manufacturing output in France rising from 0.9% over 12 months to a 2% pace over six months to a 16.5% annual rate over three months. This clear accelerating progression is good news for French production. However, quarter-to-date data only show output up at a 0.2% annual rate in the just-completed fourth quarter.

Looking at the components the output of consumer nondurable goods also shows a progression of accelerating output and that is the only component that does that; however, the four components of output consumer durables, consumer nondurables capital goods and intermediate goods show three of them with three-month output growth at a faster pace than 12-month output growth period; the exception is consumer durables that have made a sharp turn lower falling at a 9.2% annual rate over three months compared to a 1.5% gain over 12 months.

The output of autos has been sporadic, but that's not unusual for that sector. Over the most recent three months auto production is up at a 28.2% annual rate compared to -0.8% over 12 months and a sharper -8% annual rate over six months. Consumer spending on autos in France picked up in December after two months of declining, rising by 9.1% month-to-month. Consumer spending on autos is up about 22% over 12 months, then it's up at a 43% annual rate over six months, and then it settles back to a 22% growth rate over three months. This is essentially directionless performance in terms of acceleration, but it does show steady strength and at least an attempt at acceleration over six months on the part of consumers. In many other respects, the French economy has been weak. French GDP has declined in two consecutive quarters, and has annualized year-over-year growth of only 0.6% in Q3 and 0.7% in Q4.

The chart juxtaposes year-over-year industrial production traced out in red against France’s manufacturing PMI that is presented as a level. When the PMI is below 50 manufacturing output is supposed to be declining. We see that from 2020 to early 2021 that rule was obeyed fairly well. Then in later 2021, the PMI stayed at a mid-50 level while output briefly dipped and showed contraction. Later in 2022, the French manufacturing PMI fell below, and then return back to its 50% mark, as industrial output continued to fluctuate between roughly 0 and 3%. In 2023, the PMI decidedly began heading South and moving significantly below the 50% mark down into the mid to lower 40s signaling declines in the manufacturing sector. However, during this period, industrial production moved down to a lower growth trajectory, showing negative growth rates only sporadically. The PMI statistic may not map perfectly into growth, expansion, weakness, and contraction on the part of French manufacturing; however, the two signals are not incompatible either.