Economy in Brief

EMU Nominal money and credit growth have picked up and stabilized in the EMU. Over three months, EMU M2 growth is up to 2.4% over annualized compared to 1.2% over 12 months. Credit growth in the EMU is up to 2.3% annualized over three months compared to 1.1% over 12 months. It may be slow, but it is progress.

Money and credit growth have also improved over the past year in real terms. But both money and credit growth rates remain negative over all horizons in the table going back three years. There is progress, but this is not really normalcy.

The United States and the United Kingdom The U.S. and the U.K. both show accelerating nominal money growth. U.S. money growth is 3.8% over three months compared to 1.3% over 21 months. U.K. money growth is at 2% over three months compared to 0.8% over 12 months; it has also slowed over three months compared to six months.

Both U.S. and U.K. real balance growth rates have emerged to post not only stronger growth rates over three months compared to 12 months but also to post positive rates of growth over both three-month and six-month horizons.

Japan Japan is the ‘odd man out’ in this process as it is in a different portion of its business cycle. Both the EMU and the U.K. have begun easing and the U.S. has just announced that it will be heading down that path. But in Japan, the BOJ has had two rate hikes. Its nominal money growth has turned negative over three months and has decelerated from 12-months to 6-months to 3-months. Real money balances in Japan show deepening weakening and negative growth rates on all horizons in the table. Japan still has a heavy dose of braking in train while the central bank has been trying to unwind its easing posture from the pandemic and from its previously longer fight against deflation. Japan’s money slowdown looks like more substantial braking than what you would judge from overnight interest rate adjustments that the BOJ has made.

The U.K. distributive trades report offers a bifurcated view of the U.K. distributive trades sector. To generalize, the retailing portion of the report is weak while the wholesaling portion, for the most part, is firm-to-strong. There is quite a contrast to the rank standings of the line items surveyed in retailing compared to wholesaling. The average ranking across the retailing items is at the 23.9 percentile while for the distributive trades the average is the 55.9 percentile. Distributive trades average a reading that is above the respective component medians (above 50%) while for retailing the standing is about half that for the distributive trades. That leaves it well below the components’ medians in retailing averaging a standing near the top of the lower quartile of its queue of data.

Retailing changes and trends Retailing is mixed quarter-to-quarter. Capital spending and the business situation have taken a sizeable step back in retailing. However, import assessments advanced and the selling price advanced, while employment only ticked higher. Expectations for the selling price fell very sharply quarter-to-quarter as expectations for employment ticked higher. Compared to four quarters ago, both the current and expected selling price are exceptionally lower. Imports and capital spending are lower; employment is somewhat weaker as well. There has been a strong pickup over four quarters in expected employment.

Wholesaling changes and trends While wholesaling has much stronger rank standings than retailing in terms of its changes and trends, it also has a good measure of slowing. Selling prices are substantially lower quarter-to-quarter and capital spending has pulled back as well. Employment has become a bit weaker. In contrast, imports are up strongly compared to Q2 and the business situation is unchanged. After weakening sharply quarter-to-quarter, expected selling prices are only slightly weaker. Employment shows a small improvement in expectations compared to one quarter ago. Compared to a quarter ago, the selling price and the expected selling price both are much weaker. Capital spending plans are substantially weaker than they were a year-ago. But the business situation over the next six months has improved smartly and employment conditions compared to a year ago are up strongly with expected employment conditions up even more strongly.

Retailing standings Imports and capital spending are especially weak with standings below their 10th percentiles. The business situation for the next six months has only a 12.7 percentile standing. Compared to one year ago, the selling price is higher with a 51-percentile standing (above its historic median, by a small amount). But employment compared to a year ago has only a 19.6 percentile standing. Looking ahead for the selling price and employment expectations are not much different in a relative since with nearly the same standing relative to historic data as what is generated by current conditions.

Wholesaling standings For wholesaling imports are strong with a 74.5 percentile standing. Capital spending is much more restrained with a 24.5 percentile standing. The business situation over the next six months has a 67.6 percentile standing- a top one-third response. However, selling prices compared to average gains are more restrained with a 25.5 percentile standing. That is relatively weak while wholesales employment has a 70.6 percentile standing compared to where it was a year ago. Expectations for the selling price in wholesaling are for a much stronger relative performance with a percentile standing at its 47th percentile near its historic media. Expected employment is outright strong with an 81.4 percentile standing.

Germany’s IFO survey for August saw persistent deterioration in its headline readings as well as most principal components compared to their July values. The all-sector climate reading in August fell to -21.5 from -19.7 in July. Under current conditions the all-sector reading fell from -1.5 in July to -3.0 in August. For expectations, the August value fell to -18.0 from -17.6 in July – a trifecta of deterioration.

Rankings take a spanking In addition to these month-to-month deterioration in the three main readings of the IFO index for climate, current conditions, and expectations, the ranking of each of these - of course – slipped. The rankings remain extremely low. For climate, the all-sector ranking fell to 9.5% from 12.9%. For current conditions, the all-sector ranking fell to 10.6% from 11.9%, a month ago. For expectations, the ranking fell to 13.1% from 24.0%, one month ago.

Sector readings are low and deteriorate Weakness is deep, broad, and pervasive All the major aggregate sector readings for the IFO in August lie below the 15th percentile which makes them all exceptionally weak. The interpretation is that they have all been this weak or weaker less than 15% of the time. Sectors get individual rankings in each of the functional survey areas. With five-sectors in each of the three-categories, there are 15 different rankings in the table apart from the overall rankings for the all-sector aggregates. Across these 15 rankings only one of them, for construction, under the current conditions section, has a standing above its 50th percentile. That reading puts its August value above its median value for the period back to late 1991. All the rest of the sectors are below their respective 50th percentiles (and below their respective medians). The second strongest ranking is a 35-percentile standing, again, for construction, and this time in the climate category. The weakness in Germany is deep, broad, and pervasive.

Sector step-backs In the climate section the average step-back for the monthly (up-minus-down) diffusion readings is a step-back of one point for August compared to July. In August only one of the current readings improved compared to July and that was for retailing where the August reading moved up to -23.1 from -25.4 in July. Under current conditions there's only one reading that improves month-to-month, and again that is retailing that improves to a reading of -15.8 from -16.3 in July. Under expectations, there are two readings that improve month-to-month, the reading for wholesaling in August moves up to -30.8, an improvement from -31.4 in July; the reading for retailing moves up to -30.2 from -34.1. Apart from these readings all sectors deteriorated in August compared to July in all three functional categories. In addition, all the August readings have net negative diffusion values except for the services sector under current conditions where the August reading is at +12.3 which is a decline from +13.4 in July. And, even at that, the services reading has a 16-percentile standing under current conditions.

Graphic weakness... The chart also shows what the deterioration has been like across sectors though time in the IFO survey. The low point in this survey (apart from the recent Covid spike low) for many of the components came in late 2023 early 2024. Since then, there has been a minor rebound in play. However, over the last few months that has been unwinding and there's been another miniature down cycle developing.

The IFO reading and the global eco-picture The state of the world economy remains in flux and, of course, the German economy that is plugged into the international economy and depends greatly on manufacturing and significantly on international trade, continues to be under a great deal of pressure. Central banks around the world have either entered or are preparing to enter the twilight-zone of easing cycles with the exception of the Bank of Japan where inflation had been more consistently low, and where the central bank is now trying to reestablish interest rate normalization; it recently conducted its second-interest rate hike within the last month. The ECB kicked off the easing cycle early but has not followed up with a second reduction in rates. The Bank of England recently executed a more controversial rate reduction that was followed up by comments from their chief economist warning that the next rate cut may not come for some time. Just this past weekend, in Jackson Hole Wyoming, the Federal Reserve had a conference and heard its Chairman, Jay Powell, declare the time had come for the Fed to begin to embark on an easing process and to join the easing moves that have been engaged by in by central banks overseas. However, the timing and magnitude of the Fed’s move remains speculative.

Inflation – as always- holds the key The key point in all of these is that inflation which had accelerated during COVID and in the wake of the Russian invasion of Ukraine, since has slowed. But, in several places, that decline in inflation has either slowed dramatically or inflation appears to have become stuck at a pace above the target that central banks have established for inflation, which for all of them is at 2%. That reality creates a problem in terms of the outlook for markets that had been looking for a program of continued cuts as central banks to followed through on their rate reductions. But central banks have been looking for inflation to continue to fall. Inflation’s stubbornness has brought to a halt to the global cycle of rate cuts. That might be one of the factors explaining why improvements in the German IFO survey are also in the process of backtracking. The outlook is still mixed. Most still see central bankers cutting rates ahead. Yet, most rate cut profiles had been cut back, as inflation reduction stalled. But now expectations for rate cuts may step up again with the new outlook from the Federal Reserve in the US.

In this week's newsletter, we explore several key and current issues in Asia. China’s recent data has continued to disappoint, following its weak performance in Q2, with monthly readings still reflecting an uneven recovery. Additionally, the property sector remains troubled, with no end in sight for its struggles and house prices continuing to fall. Given these developments and with only a few months left in the year, China's prospects of achieving its 5% growth target appear increasingly uncertain. We also examine the state of Japan’s carry trade. Recent weeks have shown signs of stabilization after the volatility that followed the Bank of Japan's (BoJ) meeting. Finally, we review last week’s interest rate decisions in South Korea, Indonesia, and Thailand, where policy rates were kept unchanged across the board. The decision to maintain the status quo reflects various domestic considerations. However, central banks are also influenced by external factors, such as the anticipated path of US interest rates. In this context, Fed Chair Powell indicated in his recent Jackson Hole speech that the Fed plans to begin its rate cut cycle in September. This development may prompt central banks in Asia to consider similar actions soon.

China China’s recent economic data have been increasingly disappointing, as depicted in Chart 1. For instance, Q2 GDP growth of 4.7% y/y fell short of expectations. Latest monthly data have been more mixed: industrial production and fixed asset investment slowed further in July, while the unemployment rate increased and retail sales growth strengthened. This highlights the uneven nature of China’s economic recovery, with weak consumer sentiment and persistent challenges in the property sector. In response, Chinese authorities have implemented a range of measures to boost demand. These include interest rate cuts in July, and targeted initiatives to stimulate demand and address excess supply in the property market. While these actions may provide some immediate relief, more comprehensive reform initiatives could offer a better path to long-term economic stability. Given the ongoing challenges, China's prospects of achieving its 5% growth target appear increasingly uncertain.