Economy in Brief

Italian industrial production fell nearly across the board. In December, headline production fell by 0.2%; consumer goods output fell by 0.9% and intermediate goods output fell by 0.4%, while capital goods output was the exception, rising by 0.5%. Output had risen in all sectors in November; it had fallen across all sectors in October. As a result, the recent data are quite choppy and it's hard to make sense of what the underlying trend is or what might be developing.

Sequential data offer some opinions on this idea of where the trend is going. The headline output shows a 3.6% gain over 12 months, advances at a 1.1% annual rate over six months, and then declines at a 1.3% annualized rate over three months. The headline rate is clearly in a persistently declining phase. That phase is supported by intermediate goods where output is up 3.4% over 12 months, rises at a 0.7% annual rate over six months, and then falls at a 2.2% annualized pace over three months. Consumer goods and capital goods do not offer much clarity, swinging sequentially and failing to provide steppingstones to a new trend. Consumer goods output shows a 12-month gain of 0.3%, but that is substantially undermined by a 6.1% annualized decline over three months. However, for capital goods, a 7.2% growth rate over 12 months is quite similar to a 7% annualized gain over three months, showing that capital goods output has hardly lost a step despite a stumble over six months.

Output in the transportation sector in Italy is contrarily showing a tendency to acceleration in monthly data from October to November to December. Sequentially, this series is giving us no clear signals.

Other trends In the quarter to date, Italian output is falling by a 0.8% annual rate, led by a 4.3% annual rate decline in consumer goods. However, capital goods output is increasing at a 3.4% annual rate, and intermediate goods output is up at a tepid 1.6% annualized pace. Since January 2021, the cumulative change in output is lower for manufacturing overall, for consumer goods output, and for intermediate goods, while capital goods output is up by 1.6% over that span. The ranking of year-over-year growth rates on data back to 2004 shows all the sectors with growth rates above the 50% mark, indicating that year-over-year growth across the Italian sectors is greater than their median over this broad period. Headline growth is exceptionally solid, with the ranking in its 81st percentile. The transportation sector, however, has a growth rate that ranks only at its 24th percentile.

Indicators and surveys The bottom panel of the table presents performance by surveys; these tend to be more up-to-date, and they've come to be relied upon. Here we feature indicators from the EU industrial survey and from Istat on current orders and on the outlook for current production. In December, all three of these metrics showed declines; in November they all showed increases, and they showed increases in October similar to the increases logged in November. The changes in the levels of the variables over different horizons show a mild tendency toward weakening, but nothing that is clear or dramatic, looking at changes from 3-months. to 6-months, to 12-months. In the just-completed quarter (QTD), the change in the indicators is either flat or lower. All of them track below their historic median levels (rankings <50). The indicators clearly are showing weaker conditions than actual production data. These sorts of rifts are common between accounting data and survey-style diffusion data. They also generate controversy about which is right. I favor the accounting data.

In December, among ten reporting monetary union members, output increased for six of them and declined in four of them. In addition, two reporting European economies, Sweden and Norway, each showed increases in output in December. In November, five monetary union members showed decreases, while only two showed declines in October. The recent trends and data on industrial production are not exactly friendly, but neither are they scathing results. In December, the median change in the monetary union was a 0.1% increase in manufacturing output following a 0.9% median drop in November and a 0.3% median increase in October.

For the full set of reporting countries, 60% showed acceleration in December, about the same as in October. However, in November only 23% showed output accelerating on a month-to-month basis. Coupled with weak median results, the recent reports on industrial production are not particularly impressive.

Sequential results, looking at 12-month, to 6-month to 3-month growth rates, are disappointing as well. The 12-month growth rate puts the annualized median rise of manufacturing output at 2.2%, the 6-month annualized growth rate at -2%, and the 3-month growth rate at -2% for EMU member countries. For the full sample of countries, there is acceleration in 50% over 12 months, 61.5% of them over six months, and that drops down to 38.5% over three months.

In addition, these sequential data show that five reporting countries have persistent decelerations in output growth rates from 12-months to 6-months to 4-months. Those countries include France, the Netherlands, Spain, Greece, and Portugal. However, there are contrary accelerating trends in three reporting countries Malta, Sweden, and Norway; the latter two, of course, are not monetary union members but have various affiliations with the European trading bloc.

Quarter-to-date data (covering the completed fourth quarter) for the full sample show that five countries have output declining on balance in Q4. However, among monetary union members, the median change in the quarter is an annual rate of 1.1% increase in manufacturing industrial production.

Assessing the growth rates based on year-over-year growth in industrial output, only four countries in the sample have output growth rates below their historic medians on data back to 2006. Those are Austria, Germany, Luxembourg, and Malta. Other reporters have growth rates that rank above the 50% mark which puts them above their historic median. Sweden has a year-over-year growth rate in its 93.7 percentile; Norway has a growth rate in its 85.3 percentile; Greece, Portugal, and France have growth rates in their 70th percentiles, respectively.

The December news is not upbeat, but it is not dismal either. It suggests the same old industrial slog is still underway in Europe.

In our Letter this week, we explore Asia in two parts. The first reviews key developments from the past week, focusing on snap election outcomes in Japan (chart 1) and Thailand (chart 2), both of which delivered victories for incumbent parties and helped reduce near-term political uncertainty.

The second, and larger, section builds on last week’s discussion of Asia and AI, shifting the focus to AI’s potential impact on the region from an end-user perspective. On the upside, Asia stands to benefit meaningfully from the eventual large-scale adoption of AI-powered robotics, reflecting the region’s relatively high share of manufacturing value added (chart 3). That said, important considerations remain, including the cost viability of transitioning towards humanoid robotics given the sizeable upfront capital expenditure involved. Beyond manufacturing, AI adoption could also deliver gains in healthcare, particularly as many Asian economies grapple with ageing populations—implying a growing care burden alongside a shrinking domestic caregiver base (chart 4). However, regulatory, ethical, and implementation challenges persist.

At the same time, the AI transition will likely displace certain jobs, making this a race not only of adoption but of adaptability, where education—while an imperfect proxy—offers some insight into which economies may be better positioned to adjust (chart 5). Finally, bureaucratic frictions also matter (chart 6), although even traditionally more bureaucratic economies have begun introducing fast-track frameworks to avoid falling behind in what could prove to be a pivotal transition reshaping the regional, and potentially global, economic landscape.

Japan’s snap election Following a snap election held on Sunday, Japanese Prime Minister Takaichi’s Liberal Democratic Party (LDP) secured a historic landslide victory, winning a more than two-thirds majority in Japan’s 456-seat Lower House. The LDP’s coalition partner, the Japan Innovation Party, also expanded its presence to 36 seats. The outcome suggests that Takaichi’s political gamble to capitalise on strong opinion polling has paid off. While the election result has removed a key source of near-term political uncertainty for Japan, attention now turns to the policy agenda enabled by the government’s newly strengthened mandate. Among the first expected moves, Takaichi appears set to proceed with a temporary food tax pause, reducing the 8% consumption tax on food to 0% for two years. This proposal reinforces the perception that her policy stance is fiscally accommodative, even as critics raise concerns around fiscal discipline and long-term sustainability. As for the market reaction, Japanese equities rallied on stimulus expectations, bond yields rose on prospects of increased issuance to fund higher spending, while the yen recorded only muted net moves (chart 1)—prompting some speculation that some intervention may have taken place.

Japan's economy watchers index has flattened out and backed off slightly for the current and future outlooks depending on the time horizon that you seek. However, what's clear is that the index reached the low point around the middle of last year, has been rebounding and now the rebound has either run out of gas or slowed after the index has rebuilt itself considerably.

It is certainly too early to get pessimistic on Japan's economy, with Prime Minister Sanae Takaichi having just won a significant - essentially a landslide - snap election that she called after recently having been elected. The LDP would appear to be back in the driver's seat, and she has her sights set on more fiscal stimulus and expanded military spending. She is apparently much more on the same wavelength as Donald Trump in the United States. Mr. Trump was an Abe supporter, and Ms. Takaichi is a disciple of Mr. Abe.

At the moment, Japan would seem to have a groundswell of support behind the government and that government is set to try to rekindle some growth which could potentially put the Bank of Japan in a more decisively defensive track as far as setting rates and potentially raising rates.

Economy watchers index is trending In January, the economy watchers index backed off for the second month in a row. However, it still has a percentile standing in its 51-percentile, slightly above its median standing since early-2005. The headline and all the components have standings above their respective 50th percentiles on this timeline, with the exception of housing, services, and employment; three readings that are extremely important to consumers. Housing has a 26.1 percentile standing, services (the employment sector) have a 45.8 percentile standing, while employment has a 22.9 percentile standing. Despite the otherwise solid and strong set of readings, there are these three significant flies in the ointment. Corporate Japan is doing extremely well with corporations having a 66.8 percentile standing; manufacturers and nonmanufacturers, separately, each come in with readings in their mid-to-upper 60th percentiles.

The future index The future readings from the economy watchers index show continued but slight increases over the last few months. Only two future readings weaken month-to-month: housing and employment—once again two key readings as far as consumers are concerned. However, in terms of current monthly diffusion readings, the assessment of households, retailing, housing, and employment all have current diffusion values below 50, indicating net declines rather than increases. The percentile standing is for the future index are, like those for the current index, generally upbeat - and generally stronger than for the current indexes - with the future headline posting a 66.4 percentile standing in January. However, like the current index, the standing for housing is at its 21.3 percentile and the standing for employment is at its 30th percentile, both well below the neutral level that would place the ranking at the 50th percentile. Corporations show high readings, higher for the future indexes than for the current index standings. There also are high readings and standings for eating and drinking places as well as services. It's good to see services come up with a strong rating since it creates hope for the future for employment because services are the core employment sector. It will be interesting to see how this value changes in the coming months as Takaichi’s new policies are implemented and take hold.

Summing up On balance, the economy watchers index has been firm to strong. There is some slight give-back in the current index in terms of trend. But beyond the index, there's more immediate reason to be more positive because Japan has just executed a very decisive and pro-growth snap election that is going to put the new Prime Minister Takaichi and strong control of the economy at a time where she seeks to cement economic strength. These elections were just completed over the weekend, and we will see the results reflected in data in the weeks and months to come.