Economy in Brief

In this week’s Letter, we focus on the Asian consumer against the backdrop of recent global developments, alongside longer-running structural trends and economy-specific nuances. At a broad level, demographic headwinds are becoming more binding: as economies mature, population growth is slowing and ageing is accelerating, weighing on the expansion of the consumer base. At the same time, several economies are attempting to pivot toward more consumption-driven growth to help offset these forces (chart 1). More recently, while electoral outcomes in some countries have provided a boost to consumer sentiment, the renewed flare-up in the Middle East poses a near-term risk. Higher oil and energy prices threaten to squeeze household purchasing power, potentially weighing on sentiment and spending.

In China, policy efforts to raise the consumption share of GDP have delivered some early gains, reflected in firmer consumer sentiment and retail sales (chart 2). However, the impact of these measures may prove transitory if deeper structural constraints are not addressed. Encouragingly, authorities are increasingly looking to services as a new driver of consumption, given its relative underdevelopment compared to goods and manufacturing, and its potential for more sustained growth (chart 3). In Japan, post-election optimism surrounding Prime Minister Takaichi’s pro-growth agenda—including a proposed removal of the 8% consumption tax—has supported sentiment. However, rising oil prices risk reintroducing inflationary pressures, which could erode real wage gains and weigh on spending (chart 4).

In South Korea, early signs of such pressures are already emerging (chart 5). Attention is also turning to consumer expectations, particularly around housing prices following recent cooling measures, as well as inflation expectations—especially if they begin to show signs of becoming unanchored. In Thailand, post-election optimism has similarly supported sentiment and consumption (chart 6). Nonetheless, headwinds persist, notably elevated household debt and higher oil prices. While the agreement between Thailand and Iran to allow vessels to transit the Strait of Hormuz is a positive development, it remains uncertain how much relief it will ultimately provide.

The Asian consumer Asia is at a crossroads. On the one hand, as is typical for maturing economies, the region is confronting slowing population growth and rapid ageing. This implies a more slowly expanding—and in some cases shrinking—consumer base, as already evident in economies such as China and Japan. At the same time, consumption patterns are shifting toward goods and services tied to ageing and retirement, as older cohorts account for a larger share of demand. On the other hand, Asia’s household consumption share of GDP has edged higher in recent years. Much of the remaining upside—relative to global averages—is concentrated in a handful of economies, most notably China, which we discuss later. A more decisive rebalancing toward consumption could unlock additional spending power across the region, partly offsetting demographic headwinds, though the net impact remains uncertain.

French manufacturing, as assessed by the INSEE survey, fell sharply to a reading of 98.7 in March from February’s 101.7. The industrial sector reading weakened further, having already fallen to 101.7 in February from 105.4 in January. The January reading was the strongest reading since July 2022, as the rebound from COVID had gathered momentum.

Now, events in the Middle East, a dragged-out war in Ukraine, and a long period of inadequate growth in the wake of COVID, and the imposition of Tariffs by the United States are taking a toll on an economy less able to absorb shocks.

Just as inflation had settled down, there is a new oil shock in progress, a result of the attack in Iran, meant to defang it from its nuclear obsessions and its ambitions to dominate geopolitics in the Middle East by supporting various regional militia groups. The European Central Bank had corralled inflation more than controlled it, but now the ECB is more worried about oil and its impact on inflation and is determined not to make ‘the same mistake again’ referring to its procrastinated timeline for raising rates during COVID. Both the BOE and the ECB have said if the war is still in progress at the time of their next meetings, a rate hike is likely.

So, in several ways, it is a different world. In the United States, it is the same old world as the Fed has been uncommunicative about its strategy in the face of war and rising energy prices. The Fed has offered essentially no guidance. But the ECB and BOE have made clear they are not waiting on the Fed this time around.

The French economy’s main industrial indicator has a 25-percentile standing in March, a lower one-quartile ranking. Production expectations slipped to -9.4 in March from -5.7 in February, corresponding to a 37.5 percentile standing. The recent trend and own industrial likely trend both eased on the month, with the overall trend to 23.4 percentile standing and the personal likely trend to a still-above-median 50.9 percentile standing. Industrial respondents see the overall manufacturing situation as worse than their own personal prospect. Is that denial in action or excessive macroeconomic pessimism? That is something to watch for.

Orders and demand as well as foreign orders and demand fell in March. They had also fallen in February relative to January. The March readings show a 40.9 percentile standing for orders and demand against a slightly higher 47.8 percentile standing for foreign orders and demand.

The price survey news is bad. Both the own likely price trend and the manufacturing price level are higher in March and had already moved higher in February relative to January. The price expectations rank in the 74.9 percentile for own likely price trend and at the 66.3 percentile for the manufacturing price level.

Current global money and credit trends Money supply growth accelerated in February over three months compared to six months in the United States and the United Kingdom. In the EMU, money growth backed down from a 6.3% growth rate over six months to a still hot 5.6% over three months. Japan, as always, was the exception, with money growth sinking to a weak 1.5% over three months from 2.1% over six months. And the Bank of Japan still has its sights on raising rates further and bringing the level of interest rates eventually to a normalized level. In the EMU, credit growth accelerated as private credit grew at a 5.4% pace over three months, up from 5.1% over six months.

Excessive money growth: Money and credit growth are excessive compared to what would seem to be equilibrium conditions. Those conditions right now have economic growth weak, in the region of 1% to 2%, and monetary targets are 2% all around. All of them are being exceeded—at least in terms of core inflation rates.