Economy in Brief

Germany’s ZEW survey has deteriorated sharply in September. The current index has fallen to -84.5 in September from -77.3 in August. The expectations index fell back to 3.6 from 19.2 in August. It had been as high as 41.8 as recently as July 2024. Conditions and expectations for Germany have taken a sharp turn for the worse over the last few months. The chart shows that expectations are much better than their depths of 2022. Their evolution from there has been erratic, but there has been a clear and strong rebound in expectations from those lows of 2022. However, there's also been significant vacillation and we're currently in a period in which the downdraft in expectations is relatively severe. Current conditions are amid quite different circumstance; they had some rebound from their 2022 lows which were still slightly higher than the 2020 lows that occurred during COVID. However, that rebound was not long lasting; in 2023 the current index had sunk substantially and although there was some minor rebound, we are now seeing current conditions making new lows and some of the lowest readings that we've seen since the brief COVID-caused recession.

The current index has been stronger than its current value 94% of the time, underscoring how extremely weak the current observation is. Expectations have been stronger about two-thirds of the time, a significant metric, but not as draconian as the reading for current conditions. However, in July expectations were strong enough that they had been weaker only about one quarter of the time. Both expectations and current conditions have taken a severe turn for the worse.

The European Monetary Union trade surplus moved lower in July. At €15.46 billion, it is down from €17.02 billion in June. The erosion was due to a larger deficit on nonmanufacturing trade as the manufacturing balance actually improved to €39.1 billion from €37.9 billion. However, on nonmanufacturing trade, the deficit swung to -€23.7 billion from -€20.9 billion.

The chart provides the hint that the move back to surplus may have passed its peak as there is a string of surpluses having swept up to higher levels and now engaged in the process of headed for lower levels.

The trend for exports shows overall exports slowing then declining steadily from a growth rate of 2.5% over 12 months to 0.6% over six months to -8.1% over three months. This transition is driven by the growth rates of manufacturing as well as nonmanufacturing exports; both of which transition from positive growth rates over 12 months to negative growth rates over three months.

On the import side, the patterns are inconsistent although they culminate in weakness over three months. Total imports fall 2.5% year-over-year, advance at an 11.4% annual rate over six months, and then decline at a 3.2% annual rate over three months. Manufacturing imports follow this same progression; however, for nonmanufacturers, growth is at 3.2% over 12 months, that expands to a 15% annual rate over six months, and then collapses to -3.4% over three months. Import trends are chaotic.

Turning to three European countries two of them the largest countries in the European Monetary Union, we find Germany has exports declining progressively and imports doing the same. Both German export and import flows are slowing consistently and declining with imports falling faster than exports. For France, exports are accelerating from 4.3% over 12 months to 5.3% at an annual rate over six months to nearly 12% at an annual rate over three months. French imports, in contrast, don't have a clear trend but they are declining on each of those horizons. The U.K. shows declines in exports and imports year-over-year that are relatively balanced and again declines over six months that are relatively balanced for the two flows. But over three months, U.K. exports advance at an 11.3% annual rate while imports are basically unchanged at a 0.1% annual rate.

Export trends for Finland, Portugal, and Belgium find cross trends, with Finland showing a decline in exports of 17.3% at an annual rate over three months. But Portugal shows exports accelerating from 12-months, to six-months, to three-months, culminating in a 45.9% annual rate pace over three months. Belgium shows an export decline over 12 months that gives way to increases over three months and six months but again without a clear trend.

The trends for the three-month growth rates are positive for the EMU aggregates and for the exports of Finland, Portugal, and Belgium. But trends are negative for exports as well as imports for Germany France and the U.K. Over 12 months, most of the calculations show declines in trade flows, underpinning again the notion that manufacturing has been weak in Europe. That weakness lends itself to weakness in both the exports and imports; European weakness in manufacturing naturally leads to knock-on weakness in trade. That is not surprising. It has been the strength in the services sector that has tended to keep growth alive, especially in Europe.

In this week's newsletter, we examine China and highlight growing economic concerns. Investors had already expressed scepticism about China’s growth prospects even before the recent data were released (Chart 1). But this scepticism has been further validated by the latest figures, which show ongoing – and often worse than expected - deterioration (Chart 2). However, there is a hint of optimism: China's exports surpassed expectations in August, although import figures were disappointing (Chart 3). Consumer price pressures are increasing, but not severely, while producer prices continue to decline (Chart 4). As for the labour market, youth unemployment remains in double digits, with a significant rise in July, but potentially due to seasonal factors (Chart 5). Lastly, investor sentiment remains cautious, as indicated by continued outflows from Chinese equities, falling stock prices, and a generally negative market mood (Chart 6).

The China outlook China’s recovery remains uneven, with GDP growth slowing significantly to 4.7% y/y in Q2 versus 5.3% in Q1 (Chart 1). And pockets of instability persist. The property sector, for example, continues to struggle, with house prices having fallen more sharply in recent months despite numerous efforts by the authorities to address excess supply and stimulate demand. China continues to face external challenges as well, particularly in the electric vehicle (EV) sector, among others. Major economies, including the EU and Canada, have recently followed the US in imposing tariffs on imports of China-made EVs. Against this backdrop, Blue Chip Economic Indicators (BCEI) panelists downgraded their outlook for China this month. They now forecast GDP growth of 4.7% for 2024 and 4.3% for 2025, down from respective projections of 4.8% and 4.4% last month. These adjustments suggest that China is now seen unlikely to achieve its 5% growth target for this year.