Economy in Brief

Since mid-2023 there has been little change in the level of the EU indexes for the largest EMU economies. There has been slightly more fading for Germany, but then it has showed some revival over the past six months bringing it back into line. There is no clear evidence in these surveys that the U.S. tariff policy is having a major effect. But there is some inferential evidence from the drop in overall EMU consumer confidence although the results are still erratic across reporting countries. The economic situation for the next 12 months in the consumer survey is weaker since early-2025 and unemployment expectations have also risen. There is no discernible impact on consumers’ plans to make a new major purchase in the survey.

Overall sentiment and sector readings Eight of eighteen reporting countries in the EMU have step-backs in their sentiment assessments in May. That compares to eleven stepping back in April and ten in March.

The overall EMU sentiment gauge improves in May to 94.8 from 93.8 in April, but it is still below the March level of 95.1. For all of the EMU, the industrial sector improves in May, along with consumer confidence and retailing sentiment. Construction and services readings were unchanged month-to-month.

Rankings by sector show only retailing and construction above their historic medians on data since 1990. The overall reading as well as the industrial reading, consumer confidence, and services all have rankings below their respective 30th percentiles. Consumer confidence is weakest among the sectors attaining only its 18.6 percentile, but at a standing in its 22.4 percentile, services are not far behind.

There is no evidence of a hammer blow from the tariffs or of any revival since the tariff threat was launched then lessened. We look for some stimulus from the added need for Europe to carry more of its own defense burden. There is a directive to Europe from the U.S. to take care of more of its own NATO defense. So far, only the German industrial sector shows any sign of improving.

This week, we explore a series of interconnected themes—from China’s accelerating AI ambitions to evolving geopolitical dynamics in Southeast Asia, shaped in part by the United States’ increasingly inward focus and protectionist trade measures. Despite US chip export restrictions, some—including Nvidia’s CEO—have questioned their effectiveness. Indeed, select indicators suggest that China’s AI capabilities continue to advance (chart 1), even as broader dimensions of development—beyond raw performance—reveal areas where significant progress is still needed (chart 2).

In Indonesia, we discuss last week’s central bank rate cut, which some economists saw as necessary to support the economy amid external trade-related headwinds and reduced government spending. The move was also made possible by recent signs of rupiah stability (chart 3). In response to global trade uncertainties, Indonesia is also deepening regional ties, particularly with China—a relationship that has been strengthening even prior to this year’s US trade measures (chart 4).

Zooming out to broader regional issues, this week’s ASEAN-related summits reflect a growing inclination to expand ties with both China and the Middle East. As such, ASEAN’s already substantial trade with China (chart 5) may be poised to grow further. At the same time, ASEAN is now exploring a collective approach in trade talks with the US—alongside ongoing bilateral efforts—potentially to stave off further tariff increases on its exports (chart 6).

China’s AI push It has been another revealing week in US–China developments. Nvidia CEO Jensen Huang remarked that US chip export controls have not only failed but may have accelerated China’s drive for self-reliance in AI chips—particularly at the high end. Indeed, this trend appears to be playing out. China has steadily increased investment in its AI capabilities over the years, bolstered by a strategic government push that includes substantial funding. This has led to tangible progress, such as a rising number of large-scale AI systems (see chart 1). Notably, China’s advances have continued despite sustained US efforts to hinder its technological progress—many of which were introduced under previous administrations.

Economic readings continue to ebb and flow as is common. In May, the UK GfK consumer sentiment index has improved to -20 from -23. However, at -20 it's still weaker than it was in March when its value was -19. The 12-month average for GfK sentiment in the UK is -18 leaving today's -20 reading from May still weaker on balance than it's been over the past year. All of this sort of ‘to and fro’ makes it a little bit more difficult to pin down what's happening. However, the chart on the GfK reading shows that the downtrend in consumer sentiment is still in place and with readings that continue to hover around -18 to -20 - good signals still are not being emitted and the trend has not been righted.

The GfK barometer has a 29-percentile ranking data back to 1996. So, this is a bottom 30% standing for the consumer sentiment rating for GfK.

Other economic readings continue to go back and forth just today the German GDP reading was up relatively sharply as US tariffs are being cited for stimulating German activity in the near term as firms tried to export goods before the tariff in the US went into effect. We had previously seen some improvement in the European manufacturing (PMI) indices that we speculated was due to that same sort of lead and lag, behavior surrounding the expected imposition of tariffs. For the UK itself, retail sales have been stronger than expected largely because of better weather. Yes, better sales but not on any fundamental improvement.

Economic readings are always back and forth, and readings are never gospel making it difficult to the central banks to discern trends and even to set policy if they are in a data-dependent mode. But that is nothing new. It may be a bit more of a problem now when so much uncertainty seems to hang in the air with the war in Ukraine unable to be stopped, the US pushing more defense responsibility onto Europe, and the US also brandishing tariffs to try to remake the world in a way it feels will be more fair and friendly for it. Of course, one man’s ‘friendly’ is often another man’s ‘unfriendly.’

The sentiment reading in the UK features strong readings for households’ current financial situation and savings environment…but the current economic situation is only at the 30% mark and, looking ahead, it has a modest 18-percerntile rank. By income groups upper income individual’s sentiment has a 75-percentile standing compared to an abysmal 3.8 percentile standing by lower income individuals.

Inflation over the next 12-months continues to have a high standing at an 86-percentile mark while unemployment prospects (that have diminished very recently) are at a 75-perntiel standing (higher only 25% of the time) and despite recent improvement on this score the unemployment response is still 9 survey points higher over the last 12-months.

The slight improvement in the GFK survey this month is even less than its monthly standard deviation for change. It is a rise, but not significant. The UK economy continues to face a difficult situation with sentiment, seeming to remain under pressure.

S&P flash PMI readings for this selected group of early reporting eight countries continues to show relatively mixed performance across the eight countries in the table. Trends, however, suggest a phenomenon that is largely unexpected because it shows some strengthening in manufacturing against weakening in services. During this period, when US tariffs have been threatened (and counter tariffs mooted as well) - and only recently imposed. We might have expected manufacturing to be doing worse and for the services sector to be relatively steadier. It may simply be too soon for this trend to play out, or, it may be that manufacturing, in fact, has ramped up slightly in the months just before tariffs took effect as manufacturers tried to slip goods across customs portals before the tariff walls went up. In any event, the tariff walls that were threatened were not the ones that went up, and the more modest tariffs were put up in the United States except those imposed against China but even there the tariffs that eventually were set in place for the interim, we're lower than the ones that had initially been threatened.

Data show that on year to year changes, there's been a broad strengthening that has occurred across this 8 country area with 24 sector observations recorded- that is 3 sectors (manufacturing services and a composite) for each country across eight countries. In this mix, there are only 5 sector readings that are weaker on a year over year comparison. However, over six-months compared to 12-months and over three-months compared to six-months the weakening dominates with 13 of 24 sectors showing weakening over six-months, and with 14 of 24 weakening over three-months.

The monthly data that are more volatile showed that there is more weakening in March than there was in February by a large factor, as 18 sectors weakened compared to six improving. But, after March, both April and May showed only 11 sectors weakening month-to-month with 13 improving. The monthly data, however, tend to hop around and the current monthly data are still available on only a flash basis and are subject to change.

More fundamentally we can evaluate these sectors by the queue standings of their flash readings. In May this entails ranking the sectors back to January of 2021. On this basis eight of the 24 sectors show standings above their 50th percentile, putting them above their medians for the period. Only 1/3 of the sectors are performing at a better than median level on comparison with data back to 2021, a period that has not been a period of any particular strength. The current median value for the queue standings for the overall (or the comprehensive) index is in and its 40th percentile. That compares to a 52-percentile standing for the manufacturing median and a 35-percentile standing for the services median. So, manufacturing is doing relatively better (relative to its median) and services are doing relatively worse they may have generally since 2021. On this group of countries, the manufacturing PMI has averaged 51.7 on the period compared to services averaging a slightly stronger 52.7. The comprehensive average has been 52.4. These are relatively low performance results for the full period.

This period of course includes the tail end of the COVID period, plus the recovery from COVID and then it includes the period when the Ukraine invasion by Russia began and its ongoing aftermath. And now, in early 2025, it's going to start including the period where the flirtation with tariffs began. We will be on the outlook to see how the tariff negotiations progress and how the imposition of whatever tariffs arise out of this works out. For now, the concerns are that the uncertainty over what will happen with tariffs is going to be adversely affecting activity, and, of course, there are geopolitical shifts, among them Europe becoming more responsible for its own defense which should push more economic activity generally into the European theater.