Economy in Brief

The rebound that wasn’t Industrial production rebounded without vigor in February, gaining 0.4% after falling by 0.8% in January. Moreover, the trends are poor and show no sign of stabilization. 12-month to 6-month to 3-month overall output is sinking faster than is manufacturing output. And all the major manufacturing sectors show either clear signs or strong hints of progressively faster declines in output.

Half or more of the countries in the table report output falling in January and in February. This is not a stabilizing condition.

All sectors show quarter-to-date (QTD) declines in the unfolding Q1 output stream, and only six countries show QTD output increases in progress. The breadth of output increases is poor, and their trends for growth are extremely poor. So I have to brand this rebound as technically visible in February alone, but in a broader perspective, conditions are weakening.

In terms of sectors, only one EMU-wide sector has a 12-month growth rate above its median pace—that sector is capital goods, with a ranking in its 57th percentile compared to the median whose ranking is 50%. Only six countries in the table have manufacturing growth rates that exceed their historic median pace. That makes the breadth of IP growth as weak as well.

Not reassuring There is nothing reassuring about the February IP report, and it precedes the onset of the Iran war. We have since seen very broad weakness ahead in the S&P PMI indexes. We are certainly headed for a difficult period ahead. Since the period of international disruption has just begun in March, we are entering this difficult time in a weakened position. It would seem to be a good time to get defensive since inflation is bound to go up and high oil prices will weaken demand and already are creating some significant local chaos in developing economics that already were hand-to-mouth.

Japanese industrial production in February declined by 1.1%, led by a 2.1% drop in manufacturing output. By sector, consumer goods output fell by 0.3%, intermediate goods output fell by 2.1%, while investment goods output dropped by a strong 2.5%, all on a month-to-month basis. Mining sector output fell by 1.5% in February, while utilities output fell by 3.8%.

Sequentially, however, Japanese output had been accelerating, up by 0.1% over 12 months, at a 4.5% annual rate over six months, and at a 7% annual rate over three months.

Manufacturing Manufacturing output is up at 0.3% over 12 months, at a 6.6% annual rate over six months, and by 11.7% annualized over three months.

Within manufacturing, consumer goods output is expanding at a strengthening pace, rising by 0.8% over 12 months, at a 4.8% annual rate over six months, and then at a 10.8% annual rate over three months. Intermediate goods output is flat over 12 months, rising at a 2.9% annual rate over six months, and at a 6.2% annual rate over three months. Investment goods output is up at a 7% annual rate over 12 months, at a 5.2% annual rate over six months, and at a 6% annual rate over three months. However, mining output is down year-over-year; output changes get progressively worse from 12 months to three months. Utilities show a 4.8% decline over 12 months, decline by 3.2% at an annual rate over six months, and then fall at a 4.7% annual rate drop over three months. Mining and utilities sectors are experiencing more in the way of contracting effects.

Quarter-to-date Reported on a quarter-to-date basis (two months into Q1), total industry output is up at a 7.3% annual rate, with manufacturing up at a 15.2% annual rate on the same basis. For sectors, however, the strength is in consumer goods and investment goods where output is increasing at an 11.9% annual rate in the quarter; intermediate goods output is up at a 9.3% annual rate quarter-to-date. Mining output shows a decline at an annual rate in the quarter-to-date, while utilities output posts an increase.

As the chart makes clear, Dutch exports and imports are driven by very complementary forces and tend to track one another closely. Both flows boomed when COVID ended, slowed to a contraction in 2023, and then recovered to maintain steady levels (growth rates that hugged a zero-percent growth rate) from mid-2024 to late-2025. Recently, exports and imports have begun to weaken, with both flows showing contraction over 12 months. Goods imports are falling at a 5.5% pace as exports are falling at a 4% pace.

As for intra-year trends, the sequential growth rates show exports have transitioned into a progressively more contractive mode, while imports have declined over 12 months, six months, and three months, but without a clear signal on whether the trend is getting better or worse.

Of course, the trade flow depends on price trends and economic trends; both are under strain and uncertainty.

In this week’s Letter, we continue to track developments in the Middle East and their implications for Asia. While the recent US–Iran ceasefire initially provided some relief to markets, subsequent complications have kept uncertainty elevated, with no conclusive resumption of trade flows yet through the Strait of Hormuz (chart 1)—flows that are critical to restoring the global energy system to more normal conditions.

Overall, our Blue Chip Economic Indicators panellists have broadly downgraded growth expectations for Asia this year, with the exceptions of China and Taiwan, while inflation forecasts have been revised higher across the board (chart 2). That said, the growth and inflation impact from the conflict are largely viewed as transitory, with most panellists expecting them to last between six and twelve months (chart 3). Nonetheless, central banks in the region appear increasingly reluctant to ease policy further. This is evident in the latest round of decisions, where India, South Korea, and New Zealand all held policy rates steady (chart 4), citing heightened uncertainty stemming from the ongoing conflict.

While inflationary pressures are beginning to build more broadly across the region, China had already been experiencing a pickup in recent months (chart 5). This has been supported by easing producer price deflation and improving industrial profits, alongside policy efforts to curb excessive price competition among producers. Attention now turns to China’s upcoming Q1 GDP release and the full slate of monthly data due later this week (chart 6).

Middle east conflict developments Crude oil prices fell sharply earlier last week following news of a temporary US–Iran ceasefire. That said, the geopolitical backdrop remains highly fragile, as reflected in continued rhetoric from both sides, alongside the US announcement of a naval blockade over the strait after talks failed to yield an agreement. Compounding this, Iran has indicated that it cannot fully reopen the strait, citing uncertainty over the location of sea mines it had previously laid—further complicating any swift normalization of oil flows. Even prior to these latest developments, IMF-tracked shipping volumes had only begun to show tentative signs of recovery and remain well below pre-escalation levels. As such, while the ceasefire provides a welcome reprieve, meaningful economic relief will hinge on a sustained restoration of oil flows—crucially without additional frictions or costs that could impair global trade. Until then, crude prices are likely to remain elevated, albeit possibly off recent highs, weighing on growth while sustaining inflationary pressures. In Asia, where many economies are heavily reliant on oil imports, the region is likely to bear a disproportionate share of these effects.