Economy in Brief

In this week's edition, we assess the recent economic developments across the Asian region. We find that there has been a noticeable shift in both investor and economist sentiment: optimism is rising about the economic outlook for economies such as India, but toward others, such as Japan, the market has become more cautious. We also explore the growth drivers of various Asian economies, highlighting potential vulnerabilities. Economies heavily reliant on export-driven growth face different risks compared to those with comparatively diversified growth drivers, including from private consumption. This discussion leads to the topic of twin deficits—current account and fiscal—that certain economies continue to grapple with. Although such deficits are not always an immediate concern, they can often become focal points for investors. On the fiscal front, many Asian economies are expected to run deficits this year. However, recent news of significant government spending plans in Indonesia and Thailand, alongside Malaysia’s efforts to cut subsidies, will likely influence the fiscal outlook for these nations. Lastly, we flag recent trends in investor flows, and the revival of foreign investment in India and outflows from China.

These movements underscore the dynamic nature of the region, with India remaining a favourite among economists and investors, while concerns persist about prospects in China and Japan. Taiwan and South Korea are also experiencing a revaluation of their investment potential, particularly regarding the technology sector. Overall, the landscape in Asia remains fluid, with ongoing shifts in economic sentiment and investor behaviour, especially regarding government spending in Southeast Asia.

Growth Growth expectations for Asia have shifted significantly from earlier in the year, as illustrated by the changes GDP forecasts shown in Chart 1. For example, perceptions about India’s economic prospects have improved markedly, especially after its elections concluded smoothly and reform optimism increased. As a result, India is now projected to be the world’s fastest-growing major economy for the year, according to our latest Blue Chip Economic Indicators (BCEI) survey and IMF forecasts. In the meantime, advanced Asian economies such as South Korea and Taiwan have seen significant upgrades to their growth outlooks due to the technology upcycle and strong demand for AI-related semiconductor chips, key exports for these countries. However, Japan’s economic growth expectations have deteriorated, with the latest BCEI survey suggesting no growth for the year. Nevertheless, investor perceptions might shift more positively in light of Japan’s unexpectedly strong Q2 GDP report released last week.

The surplus on the international trade account of the European Monetary Union rose to 17.5 billion euros after logging €12.4 billion in May. The July reading keeps the surplus roughly in the range that we've seen this year with the three-month average at €16.1 billion, a six-month average at €18.1 billion and a 12-month average at €14.4 billion. The improvement month-to-month stems from a week May.

Better surplus; worse news All improvements in the trade surplus are generally regarded as good events because they contribute positively to GDP growth; an improved surplus may indicate ongoing competitiveness for the reporting country or unit. But reality is always more complicated than that. Exports in the monetary union fell by .2% in June after falling by 2.8% in May. Imports in the Monetary Union are down by 2.4% in June after falling by 0.4% in May. The European Monetary Union is shrinking itself to a larger surplus and that certainly tempers the good news. The improvement in the surplus is coming about more because of weakness in imports than strength in exports.

Strength through nonmanufacturing? Beyond that, we can also break the balance down into a surplus on the manufacturing trade account versus a deficit on the non-manufacturing account. zin June the manufacturing surplus rose to €39 billion from €38.8 billion in May, a small improvement the manufacturing balance when compared favorably to earlier periods in the year. The balance on non-manufacturing trade came in at a deficit of €21.5 billion compared to €26.3 billion in May. It’s the deficit on non-manufacturing trade that fell and contributed the most to the improvement in the overall trade balance. The non-manufacturing average monthly balance is slightly smaller than it had been earlier in the year.

Weak imports may reflect weak growth Weak imports raised the question of the adequacy of domestic growth and, of course, weakening imports for non-manufacturing products (in the last two months) looks more to the future since these are the raw material for goods and future periods. For these reasons the improvement in the trade surplus in June may not be the good news that it seems to be in its headline.

There's also a good deal of volatility to deal with in these numbers looking at exports manufacturing exports fell by -1.5% in June and by -1.2% in May and they have for the most part negative growth rates over 12-months and 3-months with a small positive growth rate over 6-months. Non-manufacturing shows a sharp increase in exports in June, up 6.4%, but that's in the wake of a 10% month-to-month decline in May. Non-manufacturing exports have been steadily increasing and holding to relatively strong growth parameters rising 11%, over 12-months, at a 4.8% pace over 6-months, and at a 9.2% annual rate over 3-months.

On the import side imports are falling over all horizons by relatively consistent numbers ranging from a -4.8% decline year over year to a -1.6% annual rate decline over 6-months. The recent 3-months produce a decline of 3.6% at an annual rate for total imports. Manufacturing imports into the Monetary Union show negative growth on all horizons and there's no sign of that letting up. For non-manufacturing goods the trends go the other way and there's actually acceleration; non-manufactured imports fall by 1.4% over 12-months, rise at a 4.9% annual rate over 6-months and then rise at an 8.1% annual rate over 3-months. Of course, that pattern squares so much better with the pattern of non-manufactured exports, leading to suspicions this is mostly a price effect and not a volume effect.

Germany and France and beyond Looking at countries in the Monetary Union we highlight Germany and France and find that both in June have declines in exports and in imports with relatively larger declines in June imports. Both are coming off a May where exports and imports increased and where exports were stronger than imports. Sequentially Germany shows negative growth for exports and imports on all horizons with relatively deeper declines in imports. France shows consistently rising exports - even accelerating exports- while imports decline consistently over 12-months, 6-months, and 3-months.

Separately the UK reports declines in exports and imports in both June and May and its progression from 12-months to 6-months to 3-months shows sharp export and import declines over 12-months and over 6-months followed by strong exports over 3-months and essentially flat imports over 3- months.

Elsewhere in the monetary union we look at exports and find unclear trends… Finland, Portugal, and Belgium essentially seem to go their own ways with Belgium showing consistently weak and declining exports. Finland shows a tendency toward weakness interrupted by a strong 40% annual rate rise in exports over the last three months! Portugal also shows steady but slow export growth until the recent three months where there's an increase of 11% at an annual rate.

Summing up These trends for the Monetary Union portray inconsistency more than some kind of new trend developing. However, this occurred tendency to witness on the import side with the exception of non-manufactured goods whose trend is a bit of an enigma. Separate trends from both Germany and France show weak imports. Macroeconomic data have generally been moderate to weak in EMU. It's reasonable, after looking at these statistics to begin to question growth even though this is a report that generates a stronger trade surplus that tends to contribute positively to GDP growth! When growth is being boosted in the face of declining exports by even weaker imports, it's not generally a good sign. This is simply one of the automatic stabilizers in the economy that tends to soften the blow on GDP when the economy weakens. It's too soon to tell whether this is going to develop into some broader weakness or not. But Europe has been on a bit of the razor's edge recently and while the ECB did turn the corner and start to raise rates it did that once and there's been a long hold ever since. The outlook remains unclear both for growth and for monetary policy while the geopolitical environment has continued to deteriorate and the war on Europe's doorstep is as contentious as ever. If there is some clear good news for Europe, it's that perhaps the US July employment report appears to have been misstated and the data have that have been released in the wake of that report had been considerably stronger. This gives Europe some hope for sustaining an important source of export demand for their products. However, growth in the US is not certain either and there are question marks raised about its sustainability as the Federal Reserve grapples with the question of whether to cut rates in September or not. For the US, as well as in Europe - and we can include Japan in this as well, all bets on the future are off and data dependency has stepped to the fore.