Economy in Brief

In this week’s letter, we examine the reactions of China’s equity markets following the Golden Week holidays, highlighting investors' disappointment over the latest stimulus announcements (see Chart 1). Despite this, forecasters have slightly raised their growth expectations for China (Chart 2), although pessimism lingers regarding the economy's ability to meet its 5% growth target for the year. Turning to monetary policy developments across Asia, several easing cycles have now been initiated across the region. For instance, New Zealand has begun its easing cycle with a 50 bps rate cut, driven by cooling inflation and weak domestic growth (Chart 3). In India, while the central bank kept policy rates unchanged, it made a significant move by officially shifting its stance to neutral, indicating a closer alignment with an easing approach. This comes amid a robust growth outlook, although inflation risks remain (Chart 4). In South Korea, the central bank has also commenced easing with a 25 bps cut, acknowledging cooling inflation and slower household debt growth (Chart 5), while signalling potential for further reductions ahead. Looking to the week ahead, we anticipate more rate decisions across the region, with additional easing moves seen likely (Chart 6).

Post-Golden Week China Chinese equity markets resumed trading last week after the Golden Week holidays, showing a marked repricing of market expectations (Chart 1). Initial optimism over central bank easing measures faced a reality check following government announcements. Specifically, China’s National Development and Reform Commission outlined initiatives for October, including 200 billion yuan ($28.3 billion) in advance budget spending. However, despite the significance of these measures, a larger-scale stimulus package that many had anticipated was not announced. After initial market disappointment, Financial Minister Lan held a press conference last Saturday, pledging to bolster China’s economy. However, some observers were still underwhelmed by the lack of specific numerical commitments. Looking ahead, China will release its Q3 GDP figures on Friday, which are keenly awaited as indicators of the economy's health. This will be accompanied by a range of monthly data, including industrial production, retail sales, fixed asset investment, house prices, and unemployment figures. However, insights from these figures on the impact of the recent easing measures are expected to be limited.

Money growth has turned positive and the main money center areas show net money growth. Money growth is at 1.9% year-over-year in the European Monetary Union, up by 2% in the U.S., up by 1.8% in the U.K., and by 1.3% in Japan. Comparing the 12-month growth rate to the three- and six-month growth rates in all these countries, we see a progression with money growth becoming stronger. The exception to this observation is Japan, where the M2 plus CDs measure grows 1.3% over 12 months and then reduces its pace over three and six months to 0.3% and 0.4% annualized.

In the European Monetary Union, credit growth is consistently positive and accelerating.

The monetary financial side of the ledger is starting to look very positive from the standpoint of creating growth, however, to the extent that it does that it is also being much less of a factor in terms of restraining inflation.

Real money balances Real money balances over 12 months are still declining in the EMU, in the U.S., in the U.K., and in Japan. However, the situation is in flux; over three months, real money balances are growing in the monetary union- and growing fairly strongly in the U.S.; it is advancing in the U.K. Over three months only Japan shows declines in real money balances.

EMU credit growth The European Monetary Union shows real credit growth contracting over 12 months but at growth rates of 1% or less. These negative growth rates are diminishing over three months. Credit to residents and private credit growth are declining at growth rates less than one-half of 1% as real credit in the monetary union begins to head for inflation-adjusted positive growth.

A tailwind for growth—at last? With these changes in the provision of liquidity and the impact on credit growth, nominal and real GDP growth are going to find more of a tailwind… and so will inflation…

Manufacturing output in the European Monetary Union (EMU) continues to show countries struggling to make sustained gains. In the table, EMU members are early reporters of IP data. Manufacturing statistics in August show five of those thirteen countries have declining output. In July, six of them showed declines; in June, five showed declines. Slightly more than half of the reporters do show increases on a month-to-month basis. But the margin between the number with output increasing and decreasing is not impressive. The median increase among these members in August shows IP up by 0.2%, in July the median increase was 0.4%, the same as in June. Despite the mixed nature of these statistics, the median on balance shows consistent monthly increases in output in June, July, and August. However, over these same months, the proportion of reporters showing output accelerating is generally disappointing. In June about 54% of the reporters show output accelerating, in July that fell back to 38.5%, in August that proportion improved only slightly to 41.7%. In each of the last two months, fewer than half of the reporters were showing an acceleration in output.

Sequential data details Sequential data that look at these same countries’ annualized output growth over 12 months, six months and three months show more seriously mixed and weak economic conditions. Over three months, seven of the thirteen reporters show declines in output. Over six months, eight reporters show a decline in output, and over 12 months, seven of the reporters show a decline in output. Once again, the split between the number of countries reporting output increases and decreases is only a narrow margin, but on these horizons, there are slightly more countries reporting declines than increases.

Sequential trends Not surprisingly, the sequential data show median output changes with declines. Over 12 months, the median decline rate is -0.7%, over six months it's almost the same, at -0.6%, but over three months the output decline worsens to -4.1%. These are all based on data surveyed at an annual rate. If we look at the underlying trend for output over 12 months, 75% of the reporters show output accelerating, but over six months only 33.3% show output accelerating, and over three months only 45.5% show output accelerating.

The bottom line for manufacturing output in the EMU is that monthly conditions are mixed, and the broader sequential data are showing more weakness and more of a tendency to weakness.

Quarter-to-date The quarter-to-date shows seven monetary union economies with output declining; this is two-months into the third quarter. There is some strength, but the strongest reporter is Ireland where output data are notoriously volatile; still in the quarter-to-date, Irish output is up at a 50% annual rate; output in Finland shows a 14% annual rate increase; Belgium shows about a 13% annual rate increase. Those are encouraging numbers; however, on the negative side, there are double-digit growth rates posted by Luxembourg, Malta, Greece, and Portugal. For the most part, these are small or middle-sized European economies, but Europe's largest economy, Germany also shows a quarter-to-date decline in output at a 7% annual rate, with Italy, the 3rd largest economy, showing a 6.7% decline in output at an annual rate. Spain in the EMU’s 4th largest economy; it shows output declining at a 7.5% annual rate. Among the big four European economies, only France with output up at a 1.6% annual rate has an increase in the quarter-to-date.

IP growth is undernourished Growth rates for industrial production are generally below par with the average growth rate; on data back to 2006 at the average percentile rank standing for output growth across these countries is 39.5%. That compares to a median ranking at a 42-percentile standing. Both these calculations show that the average or median growth rate for these 13 countries is weak. The representative growth rate for this group is below the countries’ respective medians for the period. In August, only Belgium, Malta, Ireland, and Greece have percentile standings for their growth rates year-over-year that are in excess of the ranking of 50% putting them above their historic medians. By comparison, the BIG-4 economies in the monetary union show growth rates that rank much weaker in their historic profiles. Listed by the relative size of their economies, Germany has a growth rate with a 20.5 percentile standing, France has a growth rate with a 43.3 percentile standing, Italy has a growth rate with a 15.6 percentile standing and Spain has a growth rate with a 25.4 percentile standing. The BIG-4 economies are relatively much weaker than the rest of the monetary union.

Momentum In terms of momentum, the large economies are split with Germany showing an acceleration in output culminating in a growth rate of 7.9% at an annual rate over three months. France shows the same tendency with weak growth rates over six months and 12 months progressing to a 10.4% annual rate of growth over three months. Italy, however, shows slippage with growth rates that are negative on all horizons and with the largest negative growth rate at -7.7% over three months. Spain also shows a progression towards weakness. Spain's progression is severe with output falling 3.7% over 12 months, falling at a 19.4% annual rate over six months and plunging at a 27.1% annual rate over three months.

Conditions in the monetary union remain mixed with a clear tilt toward weakness and with countries generally showing manufacturing sectors that are producing weaker than average results compared to historic performance.