Economy in Brief

Manufacturing PMIs in January show continued weakness; the median for the 18 countries and the table weakens slightly in January compared to December and remains weaker than the November median as well. Diffusion calculations, however, show that there are more reporters and the table with manufacturing PMIs improving month-to-month in January with 61% of them improving compared to only 28% of them in December.

Progressive statistics that look at the percentage improving in three-months compared to six-months as six-months compared to 12-months and 12-months compared to a year-ago show diffusion improving from 39% to 44% to 67%-sequentially. For the current 3-month versus 6-month comparison, diffusion shows improvement in 67% of categories. Diffusion has been steadily rising, as the sequential comparison demonstrate, although that has not been accompanied by a steady increase in the median reading for the group – indicating how complicated it is to develop overarching metrics for the group. The median reading for 12 months is at 50; over six months that slips to 49.6 and over three months there's a slight recovery to 49.8. Diffusion indexes improve in three months compared to six months, but they're still lower than they have been over 12 months on average and the reading for diffusion over three months shows a tendency for manufacturing to contract.

The far-right hand column presents queue rankings that order the January estimates on data back to January 2021. On that basis, there are only six of the 18 observations that lie above a rank at the 50th percentile which means there are only 6 (or 1/3) above their medians for this period. Countries with observations above the median are Russia, India, Canada, Mexico, Indonesia, and Taiwan. The average of the median ranks is 40.8 percentile, a number clearly below breakeven output at 50 and indicating shrinking manufacturing activity in general.

The rankings by individual countries still show a great deal of variation and weakness. Japan and China, for example, have queue standings for the manufacturing observations in January that are in their 14th and 16th percentile rankings - these are extremely weak. Vietnam is in its 28th percentile, Turkey is in its 24th percentile, but even France has a reading only in its 22nd percentile. The euro area has a ranking at its 40th percentile, the same as Germany with the same ranking as the United States which is also in its 40th percentile. Manufacturing simply continues to be weak in January.

In January, eight of eighteen observations log diffusion values above 50 (indicating manufacturing expansion); this compares to seven in December and eight in November. Sequentially the three-month average of the PMI readings shows seven over 50-for three-months and six-months with nine averaging above 50 for the full 12-months. There has been slippage in recent months compared to the 12-month performance. And there may be more trouble ahead.

This week, we examine the actions taken by the new US administration in the context of Asia. US President Trump is now following through on policies he raised during his electoral campaign, imposing 25% tariffs on Canada and Mexico, and 10% tariffs on China—countries with which the US has the largest trade deficits (chart 1). These measures have already sparked retaliatory actions. As a result, investor concerns about global growth are starting to materialize. Many of our Blue Chip panelists, for instance, having already downgraded their growth forecasts for Asia due to the risks posed by these US actions (chart 2).

We also explore growing US-China competition in the AI sector, with recent steep market sell-offs (chart 3) following the revelations about China’s DeepSeek AI model. A key factor driving China’s AI ambitions is the availability of AI chips, which faced the possibility of tighter export controls ahead of Trump’s return to office. This likely prompted China to stockpile supplies in anticipation (chart 4) and accelerated its pursuit of semiconductor self-sufficiency.

Finally, we turn to the Lunar New Year, the Year of the Wood Snake, and examine tourism trends both within China and outbound. Investors and officials alike are closely monitoring Chinese travel patterns—both domestic (chart 5) and international (chart 6)—as a key indicator of consumer health. However, country-specific developments, such as recent abduction scares in Thailand, are threatening to impact Chinese tourism receipts.

US trade actions so far A trade war may have now begun. US President Donald Trump has followed through on his earlier threats, imposing tariffs on imports from Canada, Mexico, and China. Specifically, Trump announced a 25% tariff on Canadian and Mexican imports, and a 10% tariff on Chinese goods. In response, Canadian Prime Minister Trudeau has introduced retaliatory tariffs of 25% on US imports worth approximately $105 billion. Meanwhile, Mexico and China have vowed to take countermeasures, with China filing proceedings with the World Trade Organization. One of Trump’s key justifications for these actions is to reduce the US’s substantial trade deficit, which is primarily driven by imports from these aforementioned countries, as shown in chart 1.

In the wake of a meeting by the European Central Bank and release preliminary GDP results for the Monetary Union in 2024-Q4 as well as for key countries, we're now getting some early inflation data that puts policy in conflict with economic data. At the meeting, ECB president Christine Lagarde made it clear that the central bank had cut rates and that it sees inflation on a path to come down to target. In the wake of that meeting, an announcement of GDP data for the Monetary Union showed extreme weakness for the union in the fourth quarter with GDP growth essentially at a standstill and with growth slowing quarter-to-quarter in nearly all of the countries that reported GDP on an early basis. However, the economic data for inflation don't seem to be cooperating.

Is a bird in the hand really worth two in the bush? Economists say No… There is an old expression that economists seem to turn on its head that expression is this: “a bird in the hand is worth two in the bush.” Translating this into economic data, we have actual economic data, and we also have forecasts for the future. Economists always want to make policy not based on the data in hand but on the forecast for the future (those ‘in the bush’). However, like the hunter who thinks that there are still two in the bush, the ECB, thinking it they can rely on forecasts of inflation may cause it to come home with nothing to eat. However, economic theory is pretty clear that monetary policy works with a lag and therefore it is beneficial to look at forecasts for inflation to make policy today. But that only works if the economist can forecast well, and we know that we can't forecast GDP well or inflation that well and that poses a dilemma for policy.

Despite the ECB forecast that inflation is coming to path, this is an uncomfortable PPI report released in December. It has the core PPI up by only 0.3% compared to a 0.1% rise in November. The inflation progression moves from 2.8% year-over-year to 2.4% at an annual rate over six months, to 2.7% at an annual rate over three months. That's a relatively mild and not entirely clear pattern toward acceleration. On the month, inflation has broken lower with 10 early reporting European countries all showing an inflation in December with a smaller gain month-to-month than what it showed in November. However, encouraging that might be, November brought sizable gains for a number of these countries where 79% of them saw inflation accelerating in November; a deceleration in December isn't quite as impressive, accounting for that. Moreover, if we look at countries reporting data over 12 months, six months and three months, we see that over 12 months compared to a year-ago inflation is accelerating in all of these countries. For six months compared to 12-months, inflation is accelerating in about 56% of them. For 3-months compared to 6-months, it's accelerating in all of them. Over three months, six of these ten reporting countries are showing annualized PPI inflation in double digits! This does not seem to be something we should take lightly even though the headline increase for the period for the euro area is only 2.7% annualized.

HICP inflation for January is mixed In addition, HICP data for January has been released on a preliminary basis for three of the larger the monetary union economies: Germany, France, and Spain. In each case, inflation is accelerating over three months to a higher pace than over six months. For Germany, the 3-month pace is 4.4%, for France it's 2.4%, and for Spain it's 7.1%. These accelerations have brought the year-over-year pace for Germany to 2.8%, for France to a still moderate 1.8%, and for Spain to 2.9%. Germany’s ex-energy inflation is still relatively flat at 2.4%, over three months lower than its 2.8% 12-month pace. For Spain corn inflation at 2.1% over 3-months is moderate and lower than its 12-month pace of 2.4%.

Core inflation is solid, as far as it goes The inflation picture in the core available for two countries is relatively benign, although the inflation rate for the headline for the three early reporting countries is not reassuring. In addition to that, we have PPI data that are showing some very intense pressure on a more widespread basis than we should be comfortable with.