Economy in Brief

Japan's GDP growth has picked up rising by 2.2% in the fourth quarter at an annual rate and rising 1.2% in the fourth quarter over the 4th quarter of one year ago. The 1.2% year-over-year growth rate in GDP is the strongest since the second quarter of 2023, six quarters ago. The chart showed that both measures- both the year-over-year and the annualized quarter-to-quarter results, for Japan's GDP are signaling an ongoing revival in growth after a more difficult period from mid-2023 to early-2024.

Consumption- Private consumption spending in Japan rose by only 0.1% quarter-to-quarter but it's rising by 1.1% year-over-year; the year-over-year gain was last stronger in the first quarter of 2023. Public consumption in Japan rose by 1.6% at an annualized quarter-to-quarter rate, at almost the same pace, at 1.7% in year-over-year terms. The 1.7% year-over-year pace is strong, the strongest since the first quarter of 2022, again, in terms of year-over-year public sector consumption spending.

Fixed capital- Gross fixed capital formation rose by 0.9% in the quarter at an annual rate, reversing a decline of the same magnitude one quarter ago. Capital spending generally has been higher than this in the preceding quarters.

Plant & Equipment- Spending on plant & equipment rose by 2.3% annualized in the quarter; its rise year-over-year in the fourth quarter is 1.2%. That 1.2% rise is one of the weaker increases recently. This is the weakest result in the last four-quarters in plant and equipment spending. While consumption seems to have come online, fixed investment and plant & equipment capital spending definitely are lagging behind the consumer sector.

Housing- Spending on housing fell by 0.8% at an annual rate in the fourth quarter compared to 1.8% annual rate gain in the third quarter. The Q4 year-over-year change in housing spending is -1.2%; for this particular series there are negative year-over-year numbers for the last four-quarters. However, the -1.2% year-over-year rate on the fourth quarter of 2024 is the ‘least weak’ of the last four quarters in terms of year-on-year growth rates, so there may be some signal of progress buried in these numbers on housing.

International Sector- The quarter-to-quarter change in Japan's real net export numbers move into positive territory in the fourth quarter after four previous quarters of negative numbers. Turning to year-over-year changes in Japanese net exports, they remain negative in the fourth quarter, the third consecutive negative year-over-year change in a row by quarter. However, it's the smallest negative change of the last three quarters so this period of net export deterioration may be coming to a close, which is what the strong quarter-to-quarter reading implies. Looked at separately, export growth has been slowing down; the annualized quarterly rate had logged a -15.5% annual rate in the first quarter of 2024 accelerated to 6.8% at an annualized quarterly rate in Q2, softened to a 6.1% annual rate gain in Q3 and now, in the fourth quarter, it logs an even weaker 4.1% annualized rate quarter-to-quarter. The year-over-year export growth figures turn negative in the fourth quarter to -0.1% and this is the first negative growth rate for exports year-over-year since the fourth quarter of 2020. On the import side, imports fall by 8.3% at an annual rate quarter-to-quarter after rising 8.1% at an annualized rate in the third quarter. Imports also fall by 0.1% year-over-year at end 2024; the last time import numbers were negative year-over-year was in the first quarter of 2024. So, this is not such a watershed for weakness. But weakness in imports suggests that GDP may not be doing as well as the aggregate number suggests because we'd expect with strong GDP to have stronger imports in place.

Summing up- In fact, the weak import numbers are in some way also inconsistent with domestic demand. Year-over-year domestic demand rises by 1.1%, a bit weaker than it posted in the third quarter of 2024, but still the number that is quite solid by recent experience. I’d expect to see either Japan’s imports pick up, or GDP to cool. Since GDP seems to be in an early acceleration phase, Japan is probably going to see imports step up.

German IP is on the brink of a sea-change with the new German focus on rearming and increased military spending. Still, that is in planned-policy; it will take a while for it to be reflected in actual economic performance and in economic data. For now, the trend tells us what is in train, but we should expect a marked improvement IN TREND in the future.

The sector trends year-over-year show that the declining way of output still mostly holds sway, but that year-over-year output declines have been getting smaller and smaller. Consumer goods output growth is now showing positive growth year-over-year.

Monthly growth rates Monthly IP growth rates by sector are all positive in January, a sharp contrast with December when output fell sharply across sectors, except output of consumer goods. Manufacturing orders show drops in January and November with a rise in December sandwiched in between.

Sequential German growth rates German IP is showing accelerating growth rates from 12-months to 6-months to 3-months overall and for all sectors except for capital goods, where output is back-tracking at a 2% annual rate over three months. Real sales are also accelerating sequentially, but real orders show strong deceleration. Normally this would be a situation of a coming grim reality since orders lead sales and output. But since we know military spending is going to become stimulative, we have a reasonable expectation that the weakness in orders will fail in this case to be a harbinger for future output and sales.

German indicators German indicators show mostly improvement month-to-month; the IFO manufacturing expectations series is the exception in January. And sequentially the industrial surveys are still on weakening trends: the ZEW current, IFO for manufacturing, IFO manufacturing expectations, and EU Commission industrial index.

Other Europe Other European economics in the EMU offer an array of experiences for industrial production performance and trends in January. Among the six early reporters in the EMU for other Europe in the table, three show output increases in January, three also in December, and three in November. Their sequential performances in terms of growth rates over 12 months to 6 months to 3 months show France and Spain logging declines on all three horizons. The Netherlands shows increases on all horizons. Three countries show persistent deceleration: France, Spain, and Ireland. The Netherlands shows persisting acceleration. Two non-EMU reporters, Sweden and Norway, also show persistent acceleration.

This week, we look again at US tariff policy and explore its potential implications for Asia, particularly China and South Korea. While US President Trump has temporarily dialled back his actions on Canada and Mexico, he has moved forward with doubling the tariff rate on China to 20%. However, China’s trade data have already started to exhibit more fragility (chart 1), and lingering uncertainties are also beginning to affect other trade-dependent economies, such as South Korea (chart 2). To make matters worse, South Korea is grappling with significant political uncertainty at home, with much-needed fiscal support still in limbo. This only adds to the policy uncertainty it faces (chart 3). We also take a closer look at the key messaging coming out of China’s National People’s Congress, which began last Wednesday. Notably, China reaffirmed its commitment to an annual growth target of "around 5%" (chart 4), supported in part by more expansionary fiscal policy (chart 5). Additionally, we examine China’s increased focus on shifting toward a more consumption-driven economy and the associated challenges (chart 6). This shift seems increasingly necessary, given the potential decline in export revenues due to more protectionist US policies.

The US’ latest tariff actions Last week, US President Trump proceeded with the implementation of blanket 25% tariffs on Canada and Mexico, following a prior delay. Additionally, he doubled import tariffs on China, increasing them from 10% to 20%. However, he later provided an interim reprieve for goods covered under the United States-Mexico-Canada Agreement (USMCA), delaying some tariffs on Canada and Mexico until April 2. In response, China swiftly retaliated by imposing tariffs ranging from 10% to 15% on US agricultural products, among other countermeasures. It is important to note that China's response to the US's broad tariffs has been relatively restrained. In terms of numbers, China’s export growth has already slowed amid heightened trade uncertainty, as shown in chart 1. This slowdown is partly due to the easing of growth following prior front-loading of exports, as well as a decline in imports driven by softer demand.

German real orders, those are orders adjusted for the effects of inflation, fell by 70% in January, with foreign orders falling 2.3% and domestic orders falling 13.2%. These results follow increases for all the categories December reported a rise in total real orders of 5.9%, foreign orders of 0.5% and domestic orders of 14%. In November total orders and foreign orders fell while domestic orders rose by 3.5%.

Weakness overall German orders remain in a period of weakness as overall orders are dominated by foreign orders which continued to decline. Foreign orders are falling at an accelerating pace that's strong enough to drive the total order series to a decelerating pace despite the fact that the domestic order series falls over 12 months and gets even weaker over six months but then shows a strong gain over three months. That strong 3-month gain is buried in the total by the extreme weakness in foreign orders; it declined at a 40.2% annual rate over three months.

The statistics behind these trends show total orders down by 2.5% over 12 months, falling at a 12.2% annual rate over six months and falling at a 24.3% annual rate over three months. Foreign orders fall by 3.8% over 12 months, at an 8.4% annual rate over six months and at a 40.2% annual rate over three months. Domestic orders only fall by 0.5% over 12 months but then accelerate that drop falling at a 17.1% annual rate over six months and then rebounded to rise at a 10.5% annual rate over three months.

On a quarter-to-date basis, total orders, foreign orders, and domestic orders are falling at deep double-digit paces of about 25% or more at an annual rate, but this is early in the first quarter with only January data in hand. Things could change.

Real sector sales Real sector sales show greater firmness; real sales fall only in consumer durable goods and in intermediate goods in January. They fell for capital goods and intermediate goods in December. A 3-month growth rate for real sector sales shows an 8.2% annual drop for consumer durable goods, and a 4% annual rate drop for intermediate goods, with increases elsewhere for all the manufacturing. Sales are not just improving but they're accelerating from -0.8% growth over 12 months, to a +5.4% annual rate growth pace over six months to +9.7% annualized growth over three months. Even though orders are weakening at a rapid pace, sales continue to plow ahead, and they've actually been plowing ahead at an improving pace.

On quarter-to-date basis, real sector sales are growing for all categories except for consumer durables and intermediate goods. For all manufacturing, the growth rate is 7.6% at an annual rate.

Industrial indicators for Europe Industrial indicators for Germany, France, Italy, and Spain, the four largest economies in the European Monetary Union, show negative readings in January. But there is some improvement afoot. In Germany, the reading improved slightly to -25.2 in January from -28.2 in December. France’s rating improved slightly to -11 from -11.4. Italy's reading improved to -8.2 from -9.4. Spain's reading improved to -4.4 from -4.6. Industrial confidence in these four economies improved in January across the board, but these are small improvements and improvements are from very weak readings. Looking at a broader changes, the change in these readings from a year ago finds Germany worse off by 20 points with the decline of 20.4 points and with more modest but still negative results for France, Italy, and Spain, all of which are weaker in January 2025 than they were in January 2024.

Industrial queue standings - The table provides queue standings for the industrial confidence indicators since 1990 and here we see how weak conditions are: the German numbers on industrial confidence have been weaker only about 4% of the time. France and Italy have been weaker only about 21% of the time; however, Spain shows the reading above its median! The Spanish reading for January has actually been weaker 51.6% of the time and stronger less than 50% of the time. Spain is above its median.

Queue standings reveal weakness On the upper part of the table, I present two different kinds of queue standing data, one set of percentile standings is applied to the levels of orders expressed in real terms. There we see that overall orders are above their 50th percentile, at 50.5 percentile. Foreign orders have a 64.1 percentile standing. Domestic orders are only at a 27.4 percentile standing, substantially below their historic median. Quite apart from the growth rates, the level of orders Germany is getting from abroad are still above what it has been historically, above the historic median. Domestic orders generate only a 27-percentile standing. The queue standings for real sector sales show manufacturing sales above their historic median at a 51.3 percentile mark, led by a 70.5 percentile standing in capital goods. Intermediate goods are below their median at a 43.9% standing and consumer nondurables are at a 44.4 percentile standing; both of those are marginally below the 50th percentile mark which would designate the median reading since 1990. The levels that are extremely weak are levels of real orders for consumer goods particularly weighed down by consumer durables that have been weaker only 3.2% of the time.

Growth rate standings The second set of standings is applied to year-over-year growth rates and here we see total orders foreign and domestic orders all are below their median growth rate with rankings in the 24th to the 44th percentiles. Real sector sales post only a 32-percentile standing for all manufacturing although year-over-year sales or consumer nondurable goods have a 74-percentile standing and that helps to elevate overall consumer goods to a 63-percentile standing.