Economy in Brief

Headline inflation is showing signs of behaving in the European Monetary Union (EMU). In March, German inflation saw the monthly change in headline HICP fall by 0.3%, in France it fell by 0.4%, in Spain it fell by 0.4%, while in Italy it rose by 0.1%. The year-over-year increases in the HICP headline inflation rate show a 3% increase in Spain, a 2.4% increase in France, a 2.1% increase in Germany, and a 1.3% increase in Italy. Italy wins the kewpie-doll for attaining its 2% goal first! The target for inflation in the EMU is at 2%; it’s for the whole union. The large economies in the EMU are only starting to bring their respective year-over-year inflation headlines in line with the ECB target. However, the year-over-year inflation rate in the monetary union has been excessive for the last 29-months. That's a lot of overshooting.

In this week's letter, we explore recent developments in India, China, and advanced Asian economies. We observe ongoing disparities across Asian economies in their recent growth figures, but we also note a big uptick in their latest inflation readings. Economically, India remains on a solid footing heading into its general elections, while China is showing signs of stabilization following its latest official PMI prints. The divergence extends to advanced Asia’s industrial complex, with February readings indicating continued growth in South Korean production, while Taiwan’s and Japan’s contract for idiosyncratic reasons. Nonetheless, South Korea and Taiwan continue to experience an increased share in semiconductor-related goods production, reaping continued benefits from the upswing in chip demand.

Setting aside these divergences, we also examine recent financial market developments, with a specific focus on India. We note the interim rebound in small and mid-cap equities following recent steep selloffs. Additionally, we look into the Indian rupee, which has appreciated slightly against several currencies but weakened considerably against the US dollar.

Developments in India Elections are increasingly at the forefront of attention for India watchers, as the country gears up to head to the polls from April 19. The elections will be the largest in the world, involving about 960 million voters and spanning seven phases over 44 days. India’s current Prime Minister Modi seeks to secure a third term, with his political coalition poised to compete against one led by the Indian National Congress. Heading towards the polls, the Indian economy has benefited from a robust foundation and strong growth. India’s real GDP growth accelerated to 8.4% y/y in fiscal Q3 (October-December), far outpacing growth seen in several other emerging Asian economies. Nearly half of India’s growth over the period was driven by capital formation (Chart 1), which logged double-digit growth in fiscal Q2 and Q3. India’s rapid expansion in capital investment can be partly traced to the government’s push for more infrastructure and manufacturing investment.

Japan's Tankan report for the first quarter registered strong readings across the board. The manufacturing assessment for large companies backed off to a +11 in the first quarter of 2024 compared to +13 in the fourth quarter of 2023. Large manufacturers log one of the weaker readings in the report with a queue percentile standing in its 53rd percentile compared to a slew of 90th percentile standings across assorted services sectors. The nonmanufacturing index rose to 34 in Q1 2024 from 32 in Q4 2023 for large companies and it has a 98.7 percentile standing – quite strong. The total industry index was unchanged at 22 in Q1 2024; it has a strong 92-percentile standing. So, what’s the issue?

The reading for large companies, particularly large manufacturing companies, tends to be the bellwether for this report. Despite widespread strength in the nonmanufacturing readings, the step back in the Q1 manufacturing assessment is a disappointment for the bellwether reading. The current assessment of Q1 at +11 came in one point above expectations while the assessment for the outlook came in one point below what had been expected- hardly earthshaking.

However, the outlook for manufacturing for the second quarter also showed improvement, moving up to a +10 reading in Q2 2024 from +8 in Q1 2024. For nonmanufacturing, the outlook held at +27 in Q2, the same as in Q1. These two sector readings combined for an all-industry outlook of +19 in Q2 compared to +17 in Q1. Viewed as percentile standings, the manufacturing outlook has a 64-percentile standing which is above its median but not strong. The nonmanufacturing outlook has a 98.7 percentile standing, quite strong and in line with the strong readings produced in the current quarter as well. The all-industry outlook has a standing in its 85th percentile, stronger only about 15% of the time.

There have been expectations for slightly strong readings from large manufacturers and so for some this is some more disappointing report than simply looking at the numbers. However, the numbers on their face are firm-to-strong and the rankings of the reported figures for the first quarter and for the outlook are solid and for the services sector they're extremely strong. The drop off for the current quarter assessment for large enterprises to +11 from +13 breaks a string of three straight improvements- still the ranking of the reading is above its median. Best of all, expectations are still improving compared to what they were a quarter ago.

While the survey results for establishment of other sizes are not considered to be a bellwether in this report, for medium-sized firms the manufacturing assessment was unchanged at a +6 in Q1 2024, producing a 70-percentile standing; the manufacturing outlook for Q2 2024 for medium-sized firms held at a +5 which produced a 74.7 percentile standing. For smaller firms, the manufacturing situation was weaker. Small enterprises reported a -1 reading for manufacturing in Q1 2024 after logging a +2 reading in Q4 2023. However, this still has a 60th percentile standing for them, above their historic median. The outlook for manufacturing small firms held at zero in Q2 2024, the same as the first quarter; that reading has a 76-percentile standing. Again, that's well above its median reading (which occurs at a ranking of 50%), and while the standing is solid, it is well short of being construed as strong.