Economy in Brief

In this week’s Letter, we take stock of the ongoing Iran conflict, review key developments across Asia, and assess consumer sentiment in the region. The conflict continues to weigh on markets, with oil prices remaining elevated (chart 1). At the same time, global pressure is building against the continued disruption of flows through the Strait of Hormuz, though concrete actions to restore shipments remain uncertain.

Amid this backdrop, several Asian central banks delivered policy decisions last week (chart 2), with the Middle East conflict explicitly cited as a key consideration. In effect, higher oil prices have either reinforced existing tightening biases or reduced the likelihood of rate cuts, reflecting mounting inflation concerns. On the domestic front, Thailand stood out, where Prime Minister Anutin’s decisive parliamentary re-election has eased lingering political uncertainty. Attention now shifts to how the new government will address longstanding challenges, particularly elevated debt levels (chart 3), alongside broader economic reforms. Looking ahead, the regional calendar remains active. Beyond flash PMI releases, focus will turn to Japan’s latest inflation print (chart 4) and China’s industrial profit data.

Turning to the Asian consumer, sentiment in China and Japan has improved in recent months (chart 5), supported in part by government policy and expectations of further consumer-focused measures. However, the Iran conflict poses downside risks, particularly through higher energy prices. Elsewhere in Asia, consumer confidence has stabilised (chart 6), though it remains exposed to similar risks, with the ongoing conflict threatening to weigh on sentiment across the region.

Iran conflict and energy prices The Iran conflict continues to rage, with shipping through the critical Strait of Hormuz still heavily constrained. This has kept a tight lid on crude supply, leaving oil prices significantly elevated (chart 1) relative to recent history. The resulting supply drag and price surge are adding upward pressure on inflation and, potentially, weighing on growth—particularly for oil-importing economies across Asia. That said, momentum is building on the diplomatic front. More than 20 countries have now backed a joint statement calling for safe navigation through the strait. Still, it remains unclear how this will translate into concrete actions, or—crucially from an economic perspective—how quickly it might restore disrupted oil flows.

Manufacturing output in Japan rose by 4.3% in January after rising by 0.7% in December. Total industrial production rose by 2.8% in January after a flat performance in December. By major sector, consumer goods output, intermediate goods output, and investment goods output all increased in January; each had a strong pace in January after two of three sectors experienced output declines in December and November. However, the output recovery in January is strong and solid, putting the trend for industrial output and manufacturing back on solid footing.

Sequential growth rates in Japan show overall manufacturing is growing over 12 months, six months and three months, without any particular increase or decrease in the underlying trend. The 12-month growth rate is 2.5%, the six month pace is at a 3.6% annual rate, and the three month pace has eased back to 2%.

Sequential growth rates for manufacturing are much more upbeat, with manufacturing up by 2.5% over 12 months, running at an 8.3% annualized pace over six months, and accelerating further to 12.3% at an annual rate over three months.

The main manufacturing sectors also are very upbeat, with consumer goods output rising 1.2% over 12 months, accelerating to a 3.8% pace over six months, and accelerating further to a 6.5% annual rate over three months. Intermediate goods output shows a tendency for acceleration that later calms down over three months. The 12-month pace is 3.1%, the six-month pace rises to 5.7%, and over three months the pace is back down to 4%, which is cooling from the six-month pace, but still an increase from the 12-month rate.

For investment goods, the 12-month growth rate is 3%; it rises to a 9.8% annual rate over six months and accelerates further to a 17.3% annual rate over three months. Investment goods profile is reassuring and even eye-popping, showing significant strength at a time that yen weakness is helping to make production in Japan much more profitable.

Japan is experiencing this improved performance after a long period of underperformance going back to the pre-COVID period. Industry output is 88.2% of its January 2020 level; manufacturing output is 89.4% of what it was in January 2020. By sector, consumer goods output is 87.7% of its January 2020 level, intermediate goods output is 86.5%, and investment goods production is 88.7% of what it was in January 2020.

The quarter-to-date, which is a very nascent figure since this reflects only January data, shows total industry output rising at a 12.7% annual rate, with manufacturing growing at a 27.1% annual rate, supported by double-digit increases in the growth rates of consumer goods, intermediate goods, and investment goods output.