Economy in Brief

In this week’s letter, we examine China and India – the world’s two most populous economies. We first take stock of developments in monetary policy, noting China’s continued inclination toward more easing while India keeps policy tight to contain inflation. We also note, however, still weak credit demand in China despite recent easing moves, and strong loan growth in India despite recent tightening moves. We look next at equity market performance in these two economies, noting the divergence between investor pessimism about China and continued optimism regarding India. Next, we assess longer-term demographic issues, highlighting China’s challenges with a rapidly aging population, in stark contrast to India’s relative youth. We end this week’s discussion with a shift to the advanced Asian economies of Taiwan and South Korea, noting persistent manufacturing weakness in the former. And we give a nod to the significance of semiconductors in these economies’ exports, acknowledging, in particular, their recent rebound in South Korea.

Monetary policy in China and India The People’s Bank of China (PBoC) cut the one-year medium-term lending facility (MLF) rate by 45 bps over 2022 and 2023 (chart 1) to support a struggling Chinese economy. The MLF rate cuts in turn dragged on the one-year and five-year loan prime rates (LPR), which serve as reference rates in the credit market. More recently, the PBoC announced that it will cut the reserve requirement ratio (RRR) for banks by 50 bps, effective 5 February. The central bank’s governor said the move will unleash about 1 trillion yuan ($140 billion US dollars) of liquidity into China’s financial system. The PBoC has already enacted numerous RRR cuts in recent years, in a bid to boost growth by easing monetary and credit conditions. It remains to be seen, however, if the latest easing moves can alleviate the challenges China currently faces, given the structural roots of China’s economic problems.

In contrast, the Reserve Bank of India (RBI) has pursued policy tightening over recent years, having raised policy rates by 250 bps to combat inflation. As a result, India’s policy repo rate and marginal standing facility rate have been lifted to late-2018 levels, of 6.5% and 6.75% respectively. Also, the standing deposit facility rate was lifted to 6.25%. India, like many other emerging Asia economies, has experienced price pressures from food and energy costs, prompting the RBI to raise interest rates.

Germany’s GfK survey for consumer climate fell sharply to -29.7 in February from -25.4 in January. This sharp deterioration reversed this two months of improvement in the index. This is the eighth sharpest month-to-month drop in the index headline and it is sharper than any drop experienced before May 2020. The GfK climate metric was last weaker in March 2023, nearly a year ago. Taking the current estimate, positioning it between its highest and lowest historic readings puts it at the 24.3 percentile mark, in the lower quartile of its historic high-low range. However, if we alternatively rank the observation in an ordered queue of data on the same timeline back to 2022, the February percentile standing drops to 3%. That tells us that the GfK index has been this weak or weaker only 3% of the time since 2002. The index is extremely weak, and it is dropping fast- a very bad combination.

German weakness amid global hope The graphic shows how the coming of COVID completely destroyed German confidence/climate that fell sharply and has been hovering around extremely weak readings ever since COVID occurred. And then, of course, in the wake up COVID, there was the Russian invasion of Ukraine. At the same time, the ECB has been relentlessly pursuing inflation which kicked up during this period. Among these three events, the German economy has simply been reeling. And German consumers are facing some of the worst conditions they've seen in the last two decades. Not surprisingly, Germany also faces political leadership questions. While some recent reports have showed that global conditions seem to be bottoming out and beginning to show some positive outlook, the GfK survey stands in marked contrast to this result.

Survey details – the news does not get better The details of the survey lagged by one month; they are for January 2024. German economic and income expectations fell sharply in January compared to December; economic expectations were last weaker in December 2022; income expectations were last weaker in March 2023. The propensity to buy also fell sharply in January, but it was last this weak only a couple of months ago in November 2023. The percentile account standings of these metrics show economic expectations in the lower 25.5 percentile of their ordered queue; for income expectations the standing is even weaker than that in the lower 7.2 percentile; the propensity to buy is the lower 22.1 percentile of its range. All of these are weak. And all of them have gotten significantly weaker in just the last month or two. In fact, the month-to-month drop in economic expectations has been worse only 21% of the time, and the monthly drop in income expectations has been worse only 4% of the time -Yikes!

Other Europe Confidence metrics for other-Europe are sampled from Italy, France, and the United Kingdom. The U.K. and France have readings that lag by a month behind the German reading while Italy’s reading lags by two months. The most recent observation for each one of these three countries shows an improvement compared to the month before. All three countries are on a multi-month improving trends for their confidence readings as well. None of them have confidence readings as deeply negative as Germany's. The U.K. confidence reading has a 34-percentile standing, the French reading has a 38-percentile standing, and Italy has a 74.7 percentile standing that is well above its median and seems to indicate a good deal of contentment.

GfK was worse than expected Germany’s GfK consumer climate index is a slice of unexpected bad news and at a time that other global metrics and other countries have been experiencing some improvement in their numbers and in their trends. For example, the S&P PMI indexes have showed some improvement and a bottoming out even though those indicators lag. There have been diminishing signs in the S&P survey of conditions of getting worse globally – some stability or even improvement seems in-train. The U.K., France, and Italy each show some improving trends in their confidence metrics. The United States not only did see its S&P PMI gauges improve, but the 2023-Q4 GDP report for the U.S. registered a very solid 3.3% growth after a strong third quarter, much better than private economists, or the Fed or even the administration, were looking for. At the same time, U.S. inflation data are amid an improving streak that left the core PCE deflator in the GDP report registering a 2% advance in terms of annualized quarter-to-quarter growth rates for both the third and fourth quarters. Year-over-year inflation on any measure is still well above the Fed’s and other central banks’ 2% target, but these recent releases for the U.S. are quite tantalizing and put the U.S. in a very different situation than any other country that has recently been reporting economic data.