Economy in Brief

UK industrial orders (CBI Survey) jumped to -20 in February from -30 in January. The jump put orders back at their 12-month average (-21). Orders had been slipping steadily with averages over 12-months at -21 over 6-months at -25 and 3-Mo at -24 (or -29 as of one month ago). This month’s rebound not only boosts the 3-Mo average reading, but it takes the current month sharply higher breaking the cycle of deterioration.

Export orders were similarly impacted with a -21 average over 12-months and -24 over six-months. That average is cut to -21 over three months in February but last month the 3-month average was a much weaker -27. This month’s surge in export orders has turned around the deterioration for export orders as well.

Still, total orders only rank in their 35th percentile among order data back to 1992. Export orders are relatively stronger in February at a 55.6 percentile standing, above their historic median on data back to 1992. That is somewhat surprising given the widespread weakness in Europe. Part of the reason is that about 12% of UK exports go to the US where growth is performing much better. Still, the UK’s top 25 export markets account for 54% of UK exports that go to Europe.

Stocks of finished goods on hand weaken on the month falling to +11 from +18 in January and are now not much different from their average over 3-months, 6-months, and 12-months.

The outlook for output volume over the next 3-months slipped from +7 in January to +4 in February but the +4 reading, while a step back, is consistent with the past averages. Output expectations are in their lower third historic ranking at a 33.5 percentile standing, weaker than export orders on a standing basis but in line with total orders.

Pricing is a surprise...prices were last higher than this in July of last year. Prices had slipped to a reading of +7 in December and +9 in January but have now jumped in February to +17. This compares to a 12-Month average of 15, and three-month and six-month averages at +11. The UK has been showing inflation progress that has been substantial and ongoing in terms of the Consumer index followed and targeted by the Bank of England. The CBI survey reading suggests there has been a sharp reversal for industrial prices in February. Globally goods prices have been weak along with the manufacturing sector. But now CBI industrial prices’ standing has been boosted to their 77th percentile, a reading that is quite firm and bordering on "strong".

The UK survey is a mixed report in February largely because of the inflation reading. Orders show some welcome rise is in progress. Expected output backed-off some of the recent acceleration but remains around recent average levels that show weak expansion. However, prices are sharply higher. With the UK registering recession now and the Bank of England focused on getting control of inflation, this pop in the CBI inflation survey metric is unwelcome news.

Dutch confidence in February improved to -27 from -28, a ‘small-potatoes’ gain mired in still-deeply net negative readings. The climate reading did worse, falling to -41 in February from -39 in January. But the willingness to buy improved to -17 from -20.

So, what do these index numbers really mean? We can first compare them to historic readings back to 1990. On that basis the three metrics are closely bunched in terms of their ranking. The queue percentile standings that evaluate each index number compared to its own history on this same time-line back to 1990 find them all at a standing ranking from the 18th-percentile to the 22nd percentile. That’s a tight bunching and a set of readings in approximately the lower one fifth of their historic queue of values. A lower 20th percentile reading is weak.

The progression of changes over 12-months to 6-months to 3-months shows a fairly steady increase over different periods (if you were to put them on a common per-month or per 12-month change basis). This is reinforced in the chart where there seems to be a liner progression higher that is relatively stable.

This means the confidence metrics are improving and doing so steadily but also quite slowly.

The table also provides change data back to just before Covid ran loose. The changes show all three metrics net lower on balance from their respective readings on January 2020. The climate variable has worsened the most followed by confidence overall with the willingness to buy metric seeing the smallest short-fall of the bunch. When it comes to shopping never underestimate the consumer. Shopping is a birthright, a palliative when things go wrong, it is a habit hard to stop even when the consumer has no money. As long as there is credit, there is shopping. Amen. No wonder willingness to buy is the least affected metric here, since Covid.

The Dutch economy is still struggling. Industrial production in manufacturing, like confidence, is trimming its year-on year negatives and is improving- but still declining on balance.

The Dutch manufacturing PMI survey moved up sharply in January but still did not quite climb all the way back to the neutral reading of 50.

Retail spending is also falling on balance over 12-months, but again, those 12-month declines have been diminishing as time has passed.

The evidence on the Dutch economy is that there is some progress being made but it is razor thin and slow. Of course, the outlook is brightened by the diminishing inflation rate in EMU and the added flexibility that will give the ECB in making policy looking ahead. Still, current conditions are negative on balance but still roughly stable while undergoing a snail’s pace repair. A call for hedged optimism is appropriate.

In this week's letter, we review some recent developments in Asia. Starting with Japan, we examine the implications of its underwhelming Q4 GDP result while noting the recent further weakening of the yen. Shifting next to China, we discuss its strong domestic tourism numbers during the Chinese New Year holidays and examine recent equity market movements. Next, we turn our attention to Indonesia’s recent general elections, noting the generally positive reactions observed in domestic markets so far. Lastly, we look at the Philippines, giving a nod to its latest interest rate decision and acknowledging the latest progress on disinflation.

Japan and the yen Japan encountered an unforeseen dip in its real GDP, with a decline of 0.1% q/q in Q4 2023. This marked the second consecutive quarter of contraction, signifying a technical recession. The downturn can be partially attributed to ongoing weaknesses in private consumption, though the negative impact was somewhat mitigated by net exports. Despite this, the economy still achieved an annual growth of 1%, although this was lower than the 1.7% growth observed in Q3. Japan’s disappointing Q4 performance, coupled with a much weaker yen, led to the economy’s displacement by Germany as the world’s third largest (chart 1). Previously, Japan’s economy was second only to the United States, until it was overtaken by China’s in 2010.

Retail sales in January rose 3.9% after falling 3.7% in December and rising in November. The sequential pattern of nominal growth rates shows a pickup from 3.8% over 12-months to 4.4% over 6-months to 4.9% over 3-months.

During a period when inflation has been on the move changes in nominal retail sales are not the best indicator of what's going on with sales volumes. However, real retail sales (sales volumes) in the UK show a pickup with real sales volumes up 0.7% over 12-months, at a 1.7% annual rate over six-months, and surging at a 5.9% annual rate over three-months. Retail sales volumes show real sales in January rose by 3.4% after falling 3.3% in December and rising in November- the same general pattern as for nominal sales.

Passenger car registrations have fallen for three months in a row, and they show gathering weakness. Registrations are up by 7.5% over 12-months but they're falling at a 4.7% annual rate over six-months, and at a 17.1% annual rate over three-months. This is an important category for retail spending; automobile registrations are weakening and weakening more seriously.

Surveys on retail sales are mixed in their message. The Confederation of British Industry (CBI) looks at retail sales for the time of year and finds conditions worsening in recent months with a change in assessment of -6 in November turning to -9 in December and to -22 in January. That same CBI survey shows a reading change of -44 over 12 months -46 over 6-months and -37 over 3-months. All of these are net negative numbers and are simple changes unadjusted for the length of the time span. It is consistent deterioration.

The CBI survey also offers a survey on the volume of orders looking at year-over-year changes. The year-over-year pattern monthly is irregular with a + 15 in November a - 32 in December and a + 18 in January. Over 12 months CBI order volumes year-over-year register a drop of -4 over 6-months, an increase of +3, and over three-months a change of plus one. The plus one reading shows erosion in upward momentum compared to +3 over 6 months but it's still a positive reading.

The GFK reading on consumer confidence is a +3 in January from +2 in December, but both of those gains are lower than the +6 reading for November. Sequentially consumer confidence has slowed its gains slightly with a +26 reading over 12-months compared to readings of +11 over 6 months. The +11 ga over three months would be quite strong if it kept up for 12-months; then it would trump the +26 gain, logged over 12-months.

The table also chronicles the growth rate for the CPIH. There we see that the inflation rate for 12 months six months to three months has gradually been coming down, which is a good development.

Quarter to date (QTD) statistics are relatively ephemeral at this stage since we're looking only at January compared to the fourth quarter average. On that basis nominal sales are up strongly at a 10.4% annual rate, real sales are up at a 9.9% annual rate, passenger car registrations are falling at a nearly 20% annual rate. The survey data from the CBI shows retail sales for the time of year weaker with a -30 drop, although the volume of orders is higher and GfK consumer confidence improves.

The far-right hand column evaluates the growth of the Year-over-year percentage changes for ordinary retail sales data versus ranking on the index levels for the surveys. These show a middling 55.6 percentile standing for sales growth, although for the volume of sales, conditions appear much weaker with the real sales increase at only a 33-percentile standing in the bottom 1/3 of its historic range of values. The pace for passenger car registrations the year-over-year reading still has a nearly 72-percentile standing, but shorter terms growth rates show that is being undercut. The CBI assessment of sales for time of year is a very weak 1.6 percentile standing, the volume of orders year over year has an 8.6 percentile standing, and consumer confidence reading has a 35-percentile standing. All the surveys show weak conditions. These are conditions that are very weak in comparison with historic norms.

Summing up UK economy has been struggling. The recent GDP figure showed the 2nd decline in a row for real GDP conditions in the retail sector. Retail sales are somewhat mixed with current spending holding up better than expected but the more forward-looking gauges from the CBI and the relative position of consumer confidence would indicate caution in interpreting those events. Retail sales have had a pickup recently, but year-over-year growth is still modest and survey data on merchant plans is weak...