Economy in Brief

Japan's Economy Watchers index eased in March, falling to 49.8 from 51.3 in February. The index indicates the slightest contraction underway in March, as well as a step down from its February reading. The future index also edged lower in March, but it continues to point to expansion (or expected future improvement) with a 51.2 diffusion reading. This is weaker than the 53.0 reading in February, but it’s above 50, indicating expansion. The assessment of current employment situation in March strengthened slightly to 52.5 from 52.2 in February. Both employment readings show modest net advances for employment since the diffusion readings are above 50.

Current index- The current index shows a slew of declines over three months, six months, and 12 months. Housing is an exception over all horizons while employment is an exception over six months. Still, diffusion values are above 50 in 5 of 9 current components, but diffusion is below 50 for the headline. That means most components are showing expansion; the headline is just a few ticks below signaling static growth conditions. At the far right, the column ‘queue standing’ is presented. These metrics are different; they rank the diffusion data over all diffusion values back to March 2002. On the queue standing data, any value above 50% is above its median on that timeline. Note that all current readings are above their respective medians except employment (40.7%).

Future index- The future reading shows a decline in diffusion month-to-month in March, but across components there is more weakening compared to February values (8 of 9). In January, all components improved as well as the headline, except for services. Over three months and six months, three components weakened month-to-month (eating and drinking places, services, and employment). In addition, over 3-month manufacturing weakened. All components and the headline weakened over 12 months. The diffusion values in March find the future components largely over 50 (6) compared to a few (3) below 50. Most industries see future improvement; the exceptions are for housing, manufacturing, and for employment (diffusion below 50 in March). The queue standings for the future index show housing and employment below the median value of ‘50%.’ Employment is below a queue ranking of 50% in the current reading as well as in the future reading, not a good development. At least the current employment diffusion reading is still above 50% (52.5).

In Japan’s Tankan report manufacturing is the bellwether. For the Economy Watchers, it may be ominous that manufacturing has a current diffusion value at 47.8, and a queue standing only at its 54th percentile. The future index for manufacturing is also below 50 (49.4) but with a firmer-looking queue standing in its 62nd percentile. In contrast, nonmanufacturing readings are above 50 with 70th to 80th percentile standings. But these are not Japan’s bellwethers in the Tankan. The Tankan also focuses on the performance of large firms, a division we do not see here.

The chart shows current future and current employment readings coalescing around a diffusion value of 50 (unchanged output or employment). ‘Unchanged’ has a relatively high queue standing back to 2003 judging from the standing of the current headline. It is hard to get a clear reading on momentum from the chart. For now, Japan’s growth and outlook are adequate and expanding. Conditions are largely better than they have been. But when the headline reading of diffusion at 49.8 has a queue standing in its 68th percentile, you know the comparison is with a weak history. The same is true for the future readings. The Economy Watchers index may be adequate, but it is not impressive in March.

German industrial production had revived in the last two months, rising by 2.1% month-to-month in February after rising by 1.3% in January. December production had fallen by 2% month-to-month. The upshot is that the 12-month growth rate for production is still showing a decline of 4.8%; over six months, the change in production shows a gain of 0.4% at an annual rate, while over three months, it moves up to 5.6% at an annual rate - quite a strong pace. Overall production in the quarter-to-date is rising at a 5% annual rate. Taking a much more distant benchmark, we compare the level of output today to what it was in January 2020 before COVID struck and find it's still lower by 8%. This is very definitely a short-term revival as the longer-term trends are still weak. The chart explores the year-over-year growth rates by sector for German output.

Output by sector Output by sector shows gains in each sector in February and gains in two of three sectors in January, the exception being capital goods where a 1.5% gain in February is compared to a 1.5% drop in January. All three sectors, consumer goods, capital goods, and intermediate goods show declines in December. The sequential growth rates that compare the annual rate of growth over 12 months to six months to three months find consumer goods output ramping up at an extremely strong pace from -1.8% over 12 months to a 21% annual rate over three months. Capital goods output shows some improvement, but it then runs out of gas; capital goods output is down at a 7.6% annual rate over 12 months; that's reduced to 4.5% annual rate drop over six months but then worsens ever-so-slightly to a 4.9% drop over three months. Intermediate goods get back on-theme with sequential acceleration in output, progressing from a -4.6% growth rate over 12 months, to a +6.5% annual rate over three months.

Orders, sales, PMI Manufacturing output, orders, and real sales showed increases in February, but both sales and orders declined sharply in January, after having increased in December. Manufacturing output is up for two months in a row. Germany's manufacturing PMI rose in January, but it sank back in February. Manufacturing output is accelerating. Real manufacturing orders are also showing a steady progress higher, although all of their growth rates are still negative. Meanwhile, real sales show contractions over three months, six months and 12 months; the three-month and six-month contractions are larger than the 12-month contraction. The bottom line is that manufacturing output falls into line showing sequential gains, but orders show declines amid sequential improvement, and the real sales lag behind those other gauges.

Other surveys of Manufacturing and Industry Other manufacturing surveys tell a mixed tale of the last three months. The ZEW survey shows conditions worsening from December, in January and February. The IFO manufacturing gauge shows slight improvements on that timeline; IFO manufacturing expectations also show a slight step up. However, the EU Commission's industry survey shows a progression of deeper weakness. Viewed sequentially, the ZEW survey shows steady erosion from 12-months to six-months with most of that 12- to 6-month deterioration still in-place over three months. The IFO manufacturing gauge weakens sequentially as does the IFO manufacturing expectations reading. The EU Commission index weakens progressively from 12-months to six-months to three-months.

IP in other Europe Industrial gauges elsewhere in Europe are up to date for Portugal, Spain, France, and Norway. Each of them shows an increase in February compared to January. However, each of those countries also shows a decrease month-to-month in January compared to December. And in December, half of the countries show declines and half of them show increases month-to-month. The experience across Europe obviously has been uneven. Sequential growth rates for industrial production also are uneven. Portugal has an uneven pattern. Spain shows acceleration along with Norway. There is a deteriorating pattern for France. Once again it's a mixed bag of results so we're unable to characterize Europe as doing anything as a whole. European economies still seem to be responding according to their individual circumstances. In the table, of course, Germany, Portugal, Spain, and France are all European Monetary Union members while Norway is not- but even among the monetary union members, we're not seeing the same patterns.

Q-T-D Quarter-to-date (QTD), Germany shows strong results with overall production rising 5% at an annual rate and only capital goods showing a decline on a Q-T-D basis. Portugal shows a Q-T-D gain in output of 7.4% annualized. Spain logs 13.7% with Norway showing a 1.5% gain. France shows a decline in industrial production on Q-T-D basis with a -3% annual rate reported.

The Post-Covid wrap-up Post-COVID has been a difficult time for Germany and for Europe. Industrial production in Germany is lower by 8% compared to January 2020 and all the sectors are lower. Manufacturing output in Germany is lower; real manufacturing orders and real sales are lower as well. The indicators from ZEW, the two from the IFO and the EU Commission survey all are lower compared to the January 2020 values. Industrial production across Europe is weaker compared to January 2020 except for Spain showing industrial production stronger by 2.3%. Norway is weaker by only 0.8%, fairly close to unchanged on that timeline.

In this week's letter, we look at a few more macroeconomic themes relating to Asia. We first analyse recent Asian currency performance, noting the Japanese yen’s weakness and the Indian rupee’s relative resilience in the face of a strengthening US dollar. We then examine the explanatory power of yield differentials for the respective performance of these currencies. We find that while yield differentials explain about half of the currencies’ returns variability, much remained unaccounted for, particularly in the case of the yen.

We move next to study more localized issues within specific Asian economies. Starting with Japan, we discuss the recent slowdown in the growth of its monetary base and in its central bank’s government bond holdings in light of monetary policy moves. We also examine Japan’s latest Tankan survey results, which indicate diminished large manufacturer optimism, but elevated sentiment amongst large non-manufacturers. Moving to China, we take stock of developments in its electric vehicle market and investigate possible drivers of its recent sales slump, including seasonality and increased competition. Lastly, we explore South Korea’s latest exports numbers in the context of its broader relevance for global trade. We find that while headline export growth remains positive, underlying weakness exists when semiconductors – a major export component – is removed.

Asian FX performance The US dollar has been on the front foot lately, with its strength spurred in part by some unwinding of Fed rate cut expectations. The strengthening has come to the detriment of Asian currencies, which have weakened on average by 3.5% against the dollar so far this year (Chart 1). The extent of Asian currency depreciation against the dollar has been varied, however, with the Japanese yen having weakened the most, while the Indian rupee has displayed relative resilience.