Economy in Brief

Inflation of the European Monetary Union in August rose by 0.2% compared with 0.3% gain in July and a 0.2% rise in June. The three-month inflation rate at 2.5%, however, is part of a slow progression higher that compares to a 2.2% annual rate over six months and a 2.1% annual rate over 12 months, a moderate but clear accelerating pattern.

Country level trends The four largest countries in the monetary union also are exhibiting patterns that suggest or that outright demonstrate, inflation acceleration at least based on headline measures. Germany is the largest monetary union economy and is a slight exception with a 2.2% inflation rate over three months, down from 2.5% over six months but up from 2.1% over 12 months. France demonstrates inflation rising from 2.2% over 12 months to a pace of 2.4% over six months to a strong 3.6% over three months. In Italy, inflation transitions from a low 1.3% over 12 months to a 3% pace over six months, to another strong pace of 3.7% over three months. Spain is the true exception with inflation well behaved across most of the cohorts at 2.3% over 12 months, an elevated pace but not by much, especially when compared to a 0.7% pace over six months that only ticks up to a 0.8% annual rate over three months.

Monthly results by country The inflation process among these four large countries is still somewhat mercurial as August showed declines in inflation in Germany and Italy on a month-to-month basis while Spain's inflation was flat. On the face of it, this is good news; however, July brought an increase in prices of 0.8% month-to-month in Italy, 0.5% in Germany, 0.4% in France with a moderate 0.2% gain in Spain. So whatever the three-month pace is, it's the product of some fairly erratic monthly numbers and therefore not yet something that we can consider to be very reliable.

Core inflation Core inflation is a different story. Here we get core or at least an ex-energy reading from Germany, Italy, and Spain. The August readings are contained with German ex-energy inflation up by 0.2%, Italian core inflation up by 0.1% and Spain’s core inflation up by 0.3%. These are decelerations from stronger gains in July across the board. And two of these three countries also had larger increases in June than they had in August. Looking at the progression of core inflation for Germany, the 12-month ex-energy rate is 2.5%, the six-month pace is 2.6%, and the three-month pace is 2.4%; all pretty steady stuff. Italy shows core inflation at 2.4% over six months and 12 months that moves up to 3.1% over three months. Spain shows core inflation at 2.7% over 12 months, up to 2.8% over six months and up to 4.3% over three months.

The performance of Brent oil prices explains the headline/core difference as oil prices fell over these progressively longer periods; over shorter periods oil prices have fallen faster tending to push headline inflation down faster over these short horizons contributing to the illusion of inflation deceleration. Even so, deceleration is not a pattern that is detectable in headline inflation for these countries.

The bottoms line here is that core inflation is still stuck and too high and that is too much evidence of inflation accelerating even in the face of easing oil prices for monetary policy to seek further accommodation.

The economy watchers index for August stepped up to a reading of 49.0 from 47.5 in July. The reading for the future index moved up to 50.3 in August from 48.3 in July. Diffusion indexes are constructed so that readings above 50 indicate a net expansion while readings below 50 indicating a contraction. The improvement of the current index in August, while a significant step up, still leaves that reading short of the neutral reading of ‘50’ and therefore, despite the improvement in the diffusion reading value, it continues to indicate contraction in August. Formally the diffusion index indicates a lesser pace of contraction in Japan’s economy. However, the future index signals expansion expected for the six months ahead.

The diffusion of diffusion is at the bottom of the table; that measure indicates the breadth of the change in the monthly diffusion values either month-to-month or over some of the broader periods depicted in the right-hand portion of the table. Over the last three months, for example, the headline and its nine components show improvement in 70% to 80% of those readings for current index readings. The future index shows improvement in all categories in August compared to improvement in 70% of them in July and in June.

Looking at the broader periods over 12 months, six months, and three months… both the current and the future indexes are higher across-the-board compared to a year earlier. But over six months, weakness is broadening as the future index is lower across all categories compared to its diffusion readings over 12 months- and the current index is nearly as broadly weak. Over three months there is recovery in train for the current as well as for the future index with the monthly reading higher across 50% to 60% of the categories-comparing three-month to six-month values. That means either small improvement in more than half the categories is in train, or a mixed picture of balanced ups and downs persists.

Apart from assessing monthly patterns and patterns of growth for a year-in, we can assess the level of the diffusion index compared to their historic distributions of results. The queue standing does that. The current reading as a 60.1 percentile standing while the future index has a 64.8 percentile standing. Both are above their respective medians (medians occur at a 50% ranking). Unfortunately, jobs have a below-median ranking in the both the current and the future frameworks. Current employment has a 28.9 percentile standing – quite weak. However, the distribution is packed tight in the present range of values. The current situation’s 49.7 diffusion reading compares to a full period average reading of 50.3 and a higher median of 53.1. The ranking is comparable to median value but clearly the August value is still quite close to its historic mean. The future index diffusion value, despite its 41.1 percentile standing, is above its historic mean but below its historic median of 52.4.

On balance, the employment readings are getting stronger. The current index has been moving up longer that the future index. Both the headlines are moving higher. But there is some way to go to put both the indexes at a solid level compared to where they have stood historically, based on rankings. The 60th percentile range readings are above their respective medians but are not particularly strong reading levels.

In this week's newsletter, we explore Asia’s manufacturing activity, with a particular emphasis on the semiconductor sector. While that sector continues to expand overall, some economies are experiencing a slowdown in growth (Chart 1). We also assess the growing role of electronics in Asian exports, highlighting Taiwan's significant increase in electronics export share and South Korea's ongoing recovery in this area (Chart 2). Focusing further on the electronics sector, we note an interim stall in global semiconductor sales growth, although it remains robust with double-digit increases (Chart 3). We then delve into specific Asian economies, starting with Taiwan. Here, we identify dual drivers of industrial production: consumer electronics and electronic parts, including semiconductors (Chart 4). Next, we examine Malaysia, which has developed a strong semiconductor ecosystem with expertise in back-end processes and is more recently making headway in front-end areas like chip design (Chart 5). Finally, we consider India’s emerging semiconductor sector, which, despite being in its early stages, is poised for growth thanks to recent initiatives aimed at bolstering domestic prowess (Chart 6).

Asia’s manufacturing complex The manufacturing sector across much of Asia continues to expand, although recent months have seen a deceleration in the rate of growth for some economies. As illustrated in Chart 1, Taiwan's manufacturing PMI peaked at 53.2 in June 2024 but subsequently moderated to 51.5 in August, reflecting a significant slowdown in growth for output and new orders. A similar trend is evident in Southeast Asia (ASEAN), where the PMI has recently edged closer to the neutral level of 50. Within ASEAN, Indonesia has been a notable drag, with its PMI slipping into contractionary territory in July, while Vietnam's PMI has remained above the regional average. In contrast, South Korea's manufacturing sector has shown robust momentum, with output growth reaching a 40-month high in August, thereby supporting the overall manufacturing PMI for the country.

Industrial production in July fell sharply by 2.4% after rising 1.7% in June and falling 3.1% in May. As a result of this production turbulence, Germany continues to experience declining and decelerating output growth. Over 12-months output falls at a -5.3% rate, over six months the pace steps up slightly to a -5.5% annual rate, but over three months industrial production in Germany is falling at a -14% annual rate.

This sequential slippage is mirrored in the declines of consumer goods, capital goods and intermediate goods production where the production of each of these sectors declines over 12 months, six months, and three months. Consumer goods and intermediate goods decline slightly more slowly over six months compared to 12 months, but all the categories show much sharper declines over three months than over 12 months. There's a clear tenancy for German production to show bigger declines over shorter periods and that's a disturbing development. In addition, all the sectors show declines month-to-month in July.

Manufacturing output in total shows a decline of 3.2% in July. As for overall output, manufacturing increased in June and fell sharply in May. Sequentially manufacturing output is persistently decelerating, as its 5.8% 12-month drop becomes an annual rate of decline of 17% over three months.

Hope in New Orders However, real manufacturing orders break this trend and may offer hope for a turnaround as real orders rise by 2.9% in July and by 4.6% in June after a 1.7% drop in May. Sequentially real orders are not just growing but they are accelerating from an increase of 3.8% over 12 months to an annual rate of 25.7% over three months. The path being sketched out by real manufacturing orders is explosively strong while the path being sketched out by actual manufacturing output is impulsively weak. So it looks like the resolution is going to be for manufacturing output to be dragged up from the depths in the coming months by strengthening orders- or at least that's how it appears from these trends. For the time being, sales remain weak, real sales and manufacturing fell in July, June, and May; they are declining at an accelerating pace from 12-months to six-months to three-months. Real sales and manufacturing declined, at a -5.8% rate over 12 months, at a -6.9% annual rate over six months and then at a -12.2% annual rate over three months. For the time being, manufacturing is a hotbed of cross currents.

Indicators are mixed Other indicators from ZEW, from IFO and from the EU Commission are mixed. These are from surveys that often are a little bit more sensitive and up-to-date readings than data on actually booked orders or on actually executed output or experienced sales. However, there is no hint of the kind of strength that we see in orders in these indicators. The ZEW current index shows negative readings sequentially from 12-months to six-months to three-months, but it does improve sequentially in modest steps. The IFO index for manufacturing does show some step up from 12-months to six-months to three-months. IFO manufacturing expectations also step up from 12-months to six-months to three-months but even this is somewhat moderate from 87.8 as an index reading over 12-months to 90.9 over six months to 92.2 over three months; it's a progression of advance but a minor league advance. Meanwhile, the EU Commission indexes show weakening from a -16.5 in their net diffusion reading over 12 months, to -17.7 over six months, to -17.8 over three months.

Other Europe Three European countries are early manufacturing reporters: Portugal, France, and Norway. Among these three countries, two of them have output declines in July. Norway is the exception with a solid 2% increase month-to-month in July, an increase of 2% in June and at 1.7% in May; it is showing accelerating growth from 12-months to six-months to three-months. Norway is a real success story. However, both Portugal and France show industrial production decelerating steadily from 12-months to six-months to three-months; in both cases, the three-month decline culminates in a negative growth rate in double-digits.

Quarter-to-date trends The quarter-to-date statistics show declines across all German manufacturing categories apart from real manufacturing orders. Of course, that shows a sizeable gain of nearly 38% at an annual rate in the quarter. It stands alone in that regard. The other indicators from ZEW to the IFO to the EU Commission also decline in the quarter-to-date except for the current ZEW index which improves by 6.2 points in July compared to the previous quarter’s average level. Manufacturing output for the three European countries shows sizable declines in the quarter-to-date for Portugal and France with Norway showing an annual rate increase at a stupendously strong 26.3% annual rate.

On balance, manufacturing in Germany is weak and it's weak across all categories. The ray of hope comes from real manufacturing orders that are surging as strongly as current output is declining. Sales in manufacturing are also weak. The IFO indicators for Germany are showing some progression towards better circumstances as is the index from ZEW. The EU Commission is eroding slightly sequentially as well as in recent months. There is hope but it runs against the grain of trend.