Economy in Brief

Inflation in Switzerland remains as a global envy. At 1.5% year-on-year and sequentially stable, or still moderating, the Swiss inflation rate continues to perform in its desired range as other advanced money center countries struggle to control their budgets, revive growth, and return to their pre-Covid inflation objectives.

Swiss growth remains moderate. The services sector underpins expansion while manufacturing in Switzerland occurs in the same global environment as for everyone else. That sector shows damped activity with a PMI reading indicating sluggish and contracting activity.

Swiss inflation trends reveal year-over-year inflation rates across CPI categories as higher in only 25% of them. Inflation rates over six months show more pressure with inflation accelerating in 75% of categories, but over three months conditions are stable with inflation acceleration in only 50% of categories balanced with deceleration.

That tempered behavior is not surprising because Swiss domestic ‘core’ inflation is even more tempered than its headline series. Swiss core inflation rises by 1.1% over 12 months and by less than 1% annualized over three months.

In this week's newsletter, we explore shifting trade patterns between China and the rest of the world. These shifts reflect changes stemming from the pandemic and, more importantly, from geopolitical pressures and supply chain dynamics. While China's export dependency on Western economies like the US and the EU has decreased, it remains substantial. Additionally, certain product categories, notably transportation equipment, have gained ground in China's export portfolio. In addition to this, we delve into China's rapid development in the electric vehicle (EV) sector, both domestically and internationally. This includes achieving high retail penetration domestically and experiencing rapid export growth abroad. However, concerns have been raised by several governments regarding overcapacity issues resulting from China's escalating EV exports, leading to discussions of possible retaliation via e.g. increased tariffs to address these concerns.

Expanding our scope, government concerns regarding overcapacity extend beyond EVs to other goods, such as steel products and cement, among others. Additionally, we examine China's trade relationships with its Asian neighbors, noting a diminished share of advanced Asian economies in China’s aggregate trade, while relationships with Southeast Asian nations and India have strengthened. Lastly, we delve into China's burgeoning bilateral trade ties with Vietnam, driven by deepening supply chain integration and Vietnam's reliance on China-sourced parts for its electronics exports. These developments underscore the intricate and evolving dynamics shaping China's trade landscape.

Shifts in China’s export composition In recent years, China's export landscape has undergone significant shifts, primarily influenced by the rearrangement of supply chain dynamics stemming from the pandemic and, more recently, heightened geopolitical factors. Chart 1 illustrates this transformation, depicting a decline in China's export share to Western economies like the US and the EU compared to pre-pandemic levels. Conversely, there has been an uptick in China's export share to Asian economies such as India and those in Southeast Asia. The relative significance of product categories within China's export mix has also undergone notable shifts. Specifically, China has witnessed a substantial increase in the export share of transportation equipment, plastics, rubbers, and basic metals. This surge can be attributed to an increase of exports of specific products, such as electric vehicles (EVs), a trend we will delve into further below.

The S&P PMI readings for May 2024 in manufacturing show a tendency for improvement month-to-month. The median PMI value increases to 50.6 from 49.8, While the proportion of reporting units improving moved up to 50% from 33%, leaving that proportion at a dead-neutral level.

PMI levels summarized The global medians for individual average readings sequentially over 12 months, six months, and three months show improvements from 49.3 to 49.4 to 50.2. The gains are steady but very moderate improvements in train with all values clustered closely around ‘50’ which is the break-even point between expansion and contraction for these manufacturing PMI indexes. While the average reading over three months is at 50.2 and the average in the current month is at 50.6, these are values that marginally above 50; it's hard to get too excited about the fact that the indexes are up above 50 again, indicating manufacturing expansion. The median is above the level of 50 for the first time in 22 months – a long stretch for manufacturing contraction. But the average reading for this same group has been above 50 for four months running and had been below 50 for 18 months prior to the start of that string.

The breadth of improvement The proportion of reporters improving over three months moved down to 44% after rising sharply to 94% over six months and sitting at 83% over 12 months. These results have flipped from what had been reported previously as year-over-year weakening in the PMI indexes compared to a year ago had been common. But now, there's been enough improvement that we're looking at year-over-year increases as well as net increases over six months. But since there has been improvement from those lows, the proportion of reporters improving over three months has declined to 44%.

Very neutral neutrality is indicated The rank standing for the diffusion readings of these reporters in the table shows nine of the 18 with values below 50% and nine of the 18 with values above 50%. The median value of all these individual percentile queue standings is also at 50%. All of this underscores the sense of neutrality in this report as the queue standings show that values are at their four-year median values and that the median itself sits at 50% and the number of reporters who are improving on the month is also split at 50/50. And the diffusion values themselves are just beginning to rise above a diffusion level of 50 indicating an extended period of (largely modest) contraction may be coming to an end.

China, the United States, and EMU China, the U.S., and the European Monetary Area all show manufacturing PMIs that are in a definable upswing in the chart. For the euro area, the upswing is about a year old; for the U.S. and China, the upswing is a year and a half to two years in progress. The gradients are still relatively shallow but also relatively stable.