Economy in Brief

European car registrations in April rose 11.8% after falling by 8.8% in March. Looking at smoothed data with percent changes calculated from three-month moving averages, the April gain was 0.3% after a March gain of 0.5%. This simply means that in smooth terms gains in auto sales/registrations continue and haven't changed speeds by very much.

Accounting by country, it was a strong monthly gain in April in Germany with car registrations up to 8.4%; Italian registrations were up by 3.3% in April. Registrations fell by an outsized 8.8% in the United Kingdom; they fell by 1.8% in France, and by 0.5% in Spain. The country level data represent reversals month-to-month for all countries except the U.K. In other words, countries with sales gains in April had declines in March and countries with declines in April had increases in March. The exception is the U.K. that had substantial declines in both March and in April; however, the U.K. is also coming off of a huge gain in February that by itself is nearly as big as the two months consolidated drops in April and March; the U.K. February gain is by far a much larger than the increase in registrations seen in any other European country in the table in that month. The month-to-month declines for sales for two months running in the U.K. is not surprising; the U.K. economy has been struggling. However, when we see that those two months’ drops compared to such a strong gain in February the overall signal is muddied and muted.

Sequential annualized sales for all of Europe show 12-month gains at 13.9%, compared to a 4.2% annual rate gain over six months, and a 3.6% annual rate gain over three months. There's a sharp slowdown from the 12-month pace compared to three and six months. Surprisingly, there's more variability in the smooth data that show European registrations up 6.1% based on three-month averages over 12 months but a growth rate of -6.9% over 6 months based on smoothed data, and a growth rate of 6.1% over 3 months based on smoothed data.

Country level sequential data only show relative clarity for Italy and the United Kingdom. U.K. 12-month growth rate is 1.8% while the three-month and six-month growth rates are on the order of -20% annualized. Germany and Spain both show increases on all horizons. For Germany, the year over year growth rate is 12.9%, pretty similar to the three-month growth rate; however, there's a jump in the growth rate that doubles over six months and then settles back down. For Spain, the 12-month growth rate is 22.5%; it edges down slightly to 18.2% at an annual rate over six months and then jumps sharply to a 47.1% annual rate over three months. Germany and Spain clearly have the strongest registration profile. The U.K. clearly has the weakest while France and Italy are in between case; both France and Italy show gains over 12 months and declines in registrations over six months, but over three-months France shows an increase in registrations at a 19% annual rate while Italy shows a decline at a -14% pace. Italy shows a decelerating pace of registrations from 8.2% over 12 months to -13.2% over 6 months, the decline gains pace to -14.2% over 3 months.

Canada’s year-on-year inflation rates broke lower in April with a strong decline in Canada’s CPIx that excludes eight volatile components from the CPI. The CPIx has lower volatility than the CPI headline (1.7%) but its volatility is higher than the core (1.4% vs. 1.1%).

Economists -including some central banker economists among them- have expended some effort in looking at inflation measures that exclude certain things beyond the traditional core omissions (food, energy…and, maybe, tobacco). The Dallas Fed in the U.S. has offered a trimmed mean; the Cleveland Fed has a damped measure as well. There are other efforts in the U.S. to exclude certain components such as housing costs linked to high mortgage rates (one of the items jettisoned by Canada’s CPIx as well); during COVID, there was the removal of surging truck prices in the U.S. gauge.

My view of these efforts is that I have a lot more respect for Canada putting out a price index that eliminates volatile items at all times, offering a structural parallax view of inflation, compared to the U.S. approach of eliminating items that are pushing up the rate of inflation the most. The traditional approach is to look at core inflation instead of headline inflation from time-to-time when commodity prices flare (food or energy particularly). This has been done to take the focus away from the part of the inflation process that is most volatile. However, when inflation is really rising, these components likely will be the most volatile part of the index. By definition, the most volatile components will surge the most when inflation rises. So, if inflation - when it gets going - always is stimulated through the same components, downplaying the structurally volatile items will lead to a misappraisal of inflation and of how it may be gathering momentum.

Canada’s indexes show that CPIx inflation is the lowest now (year-over-year), but it was traditional inflation (CPI) that rose the most. The question is whether CPIx will continue to lead the way lower.

The METI tertiary (Service index) for March fell back to 100.2 from 102.7 in February when it spiked from 100.5 in January. The spike high of February is now back below its January level. At the bottom of the table the IP index for industry (excluding construction) is presented side-by-side with the METI tertiary index (for Services).

The rank of year-on-year growth in the IP index and the rank for the tertiary sector growth both are low, in the 20th percentile of all growth rates since mid-2009. The level of the IP index has been weaker on that timeline only 10.3% of the time. The METI services index has been lower only 44% of the time. These rankings mark both the industrial and services sectors as weak- both are stronger more frequently than they are weaker.

Interestingly, the leading economic index for Japan has a level standing on the same timeline at its 53rd percentile, above its historic median (median resides at 50) and a year-on-year growth ranking in its 72nd percentile – quite a solid percentile standing.

The Teikoku indices are diffusion metrics. They cover five sectors of which only services have a diffusion value above 50, indicating expansion. And the services index value is at 51.0, not exactly decisively endorsing the trend for expansion. The Teikoku index shows below-50 values for a long string of values across sectors with only services above 50 consistently- but only for the last 13-months. The levels of the values for Teikoku are above their ranking of 50 on levels across sectors except for manufacturing. This, of course, tells us with such weak current diffusion levels, readings have been persistently weaker and contracting- since current index standings are above their historic medians broadly and yet current diffusion values also are broadly below 50! Growth rankings of current indices are all below their historic medians indicating that there is no revival in progress.

The economy watchers survey also employs diffusion indices across sectors and for employment as well as with a future index. In diffusion terms the selected indices show below-50 readings for retailing and for the current economy-watchers headline. Employment, the future index, and services, as well as eating and drinking place, show above-50 readings on diffusion. But the rankings on the year-on-year growth for these metrics in uniformly below 50 – revealing below-normal growth (below median, formally) for these indices. The index level rankings show all readings above their historic medians except for employment.

On balance Japan’s data show a great deal of substandard performance and a prolonged period of substandard results. None of this- however memorialized by statistics is surprising to any Japan economy watchers. Japan is dealing with a long-term population decline that policy has not yet addressed. It is ending a period of deflation flirtation and a period of extraordinary central bank stimulus to combat that situation. In the wake of Covid and persistent Bank of Japan stimulative policy, Japan has distanced itself from deflation, but policy is still trying to evaluate where the inflation situation stands. The yen is weakening and once again Japan’s policy faces challenges.

In this week's letter, we look at direct investment flows across Asian economies. We find that there has been a discernible decline in foreign direct investment (FDI) across several economies in the region in recent quarters. This dip in investment activity can be attributed to various factors, including shifts in investor sentiment towards the recipient economies.

Additionally, we explore outbound direct investment flows from these economies. Hong Kong remains the primary intermediary for mainland China's investment flows, underscoring its crucial role in facilitating cross-border investments. Conversely, Japan, boasting the world’s largest stock of net international assets, maintains a strong preference for the United States as its favored investment destination. This preference underscores the enduring ties and strategic partnerships between the two nations.

Finally we shift our focus to scrutinize specific economies in Southeast Asia, where we observe a noteworthy recovery in FDI inflows following the pandemic. We find that investor interest in pivotal themes such as the energy transition and the digital economy has played a vital role in propelling these flows. We note, nevertheless a slight retracement in these flows in 2023.

China Foreign direct investment (FDI) in China has plunged in recent months, based on the standard measure adopted by the Ministry of Commerce. Monthly actual utilized FDI has consistently shown double-digit year-on-year declines throughout the year so far, with the contraction worsening to 38.2% in March (Chart 1). Additionally, China’s direct investment liability flow plunged to under 300 billion yuan in 2023, from 1.25 trillion in 2022. Analysts attribute China’s FDI declines to various factors, including domestic growth risks and ongoing tensions with other countries, such as the United States. However, the impact on growth may be nuanced, as business investment within China is predominantly domestically sourced. The outlook on China’s broader economy however, remains uncertain, with April’s economic data presenting a mixed picture. Specifically, growth in retail sales and fixed asset investment slowed further in April, while industrial production logged an unexpected growth rebound.