Economy in Brief

The EU Commission indexes for May rebounded to 96 from 95.6 in April after standing at 96.3 in March. On a month-to-month basis, there's very little change across the major components of the EU indexes. The industrial index is unchanged at -10, the retailing index is unchanged at -7, the construction index is unchanged at -6, consumer confidence improves to -14.3 from -14.7, and the services index moves up to +7 in May from +6 in April. The gains in those two sector readings are responsible for the gains and the EMU sentiment index on the month. But three of the five component readings are unchanged month-to-month in May.

Across 18-early reporting countries, only four showed a deterioration in readings in May, compared to seven that deteriorated in April, and five that eroded in March. Fewer countries have been posting declines in their country sentiment indexes in recent months.

Rankings, however, continue to reveal a great deal of weakness, as the overall monetary union metric has only a 34.3 percentile standing which puts its rank just above the lowest 1/3 of its historic results. Among the eighteen countries listed in the table, only three have rankings above their historic medians. Those are Lithuania, Cyprus, and Greece, all are relatively small European Monetary Union member countries. Among the four largest countries, German performance ranks in its 24.7 percentile, France has a 41.3 percentile standing, Spain has a 42.8 percentile standing, while Italy has a 48.6 percentile standing. None of that is impressive.

The five components of the European Monetary Union index show above-median standings for retailing and for construction, with the industrial gauge at a 26.4 percentile standing, the consumer confidence at a 27.5 percentile standing, and services at a 40-percentile standing. The European Monetary Union in May has a 34.3 percentile standing.

Money growth is accelerating across major monetary center countries with the exception of Japan. Three-month money growth is stronger than six-month money growth across all countries in the table except Japan; three-month money growth also is stronger than 12-month money growth across the table except in Japan.

Looking at money growth rates expressed in real terms, three-month money growth is stronger than 12-month money growth for all countries including Japan. However, that does not mean that money growth is strong; it just means that it's stronger than it was 12-months ago. For example, in the euro area, three-month money growth is still negative, as it is in the United States. However, the United Kingdom and Japan report non-negative values with U.K. money growth in real terms over three months at a 0.7% annual rate while Japanese money growth over three months expressed in real terms is flat. In all comparison, those yield accelerations.

EMU In the European Monetary Union, money growth has been accelerating from 12-months to six-months to three-months steadily. Credit to residents also has been expanding on that timeline as has private credit. Credit growth expressed in real terms also shows progressively improving growth rates from 2-years to 12-months to six-months to three-months. However, those increments are still small and on all those timelines credit growth is still contracting. It's just contracting progressively at a weaker pace.

The chart at the top shows how nominal growth rates of money supply had turned negative and have since been trending more toward zero with the exception of Japan where the money growth rate never really contracted but it edged down and since has stabilized.

Although inflation progress has slowed broadly, there has been little backtracking on the progress that inflation has made since coming down from its peak in these various countries. However, inflation is still above-target in these inflation-targeting countries and that remains a problem especially with the rate of change and inflation having slowed to a crawl. As of March of last year, inflation across these four countries on average still was accelerating. Deceleration began in April 2023. Prices fell the most sharply on average in October and November of last year when the average year-on-year drop for the 12-month inflation rate compared to one year-earlier was -4.4%. That average drop has pulled back to -2.9% April 2024. While that May still seemed large, let’s look more closely. In January, February and March, the average inflation rate that these four countries reported in each of these months was 3.1% and by April that had dropped to only 2.9%. For some countries, shorter trend inflation rates are showing a rising trend. The most recent trend gets more complicated, but all of these countries reached a recent low three-month inflation rate in January-2024 or November-23 or December-23. Compared to their respective lows, current (April 3-month) inflation shows an acceleration averaging 2.1% from those lows. This is not an argument intended to support the notion that inflation is accelerating, just to point out that deceleration has really run into a snag and the future is, therefore, less clear than it seemed at the end of 2023.

In the United States, there has been some backtracking of inflation, and although a few months ago the Fed seemed on a fast track to three rate reductions this year, the Fed has been backtracking furiously with a number of Federal Reserve officials scaling back their expectations for Fed policy this year and a number of private institutions no longer looking for Fed cuts at all from the U.S. in 2024.

In this week's newsletter, we assess the recent trends and factors shaping Japan's balance of payments. Notably, Japan has witnessed a substantial improvement in its current account surplus in recent months, with an improved goods balance a primary driver. We attribute Japan's improved goods balance in part to a favorable trend in its terms of trade, although we also acknowledge the rise in export volumes for certain key products. Additionally, we highlight Japan's significant net primary income flows, which have played a crucial role in bolstering its current account balance. These substantial primary income flows are arguably a consequence of Japan's long-standing accumulation of overseas assets through both direct and portfolio investments.

This discussion naturally leads us to Japan's substantial net international investment position, which stands as the largest globally. Upon closer examination, we observe a pronounced shift within Japan's investment portfolio, with direct investment holdings progressively displacing its portfolio investment holdings in relative significance. Lastly, we explore recent patterns in Japan's outbound direct investment flows, with a pronounced increase in investments directed towards the US. In contrast, investments into China and the European Union have experienced a downturn in recent times.

Japan’s current account Japan’s current account surplus has surged since early 2023, surpassing 25 trillion yen ($160 billion) in March 2024 on a rolling 12-month basis (Chart 1). A significant portion of this improvement stems from the easing of its goods trade deficit, which decreased to about 3.6 trillion yen ($23 billion) over the period. Concurrently, Japan’s net primary income has remained the primary driver behind the economy’s overall current account surplus, hovering around 35 trillion yen ($220 billion) in recent months. This unique characteristic distinguishes Japan from many other Asian economies, where goods and services exports typically play a more dominant role in current account inflows.

The U.K. industrial survey shows business optimism in the second quarter moving to a level of +9 from -2 in the first quarter of 2024; that's up even more sharply from a Q4 value of -15. The survey shows a sharp improvement in business optimism for the quarterly industrial survey.

U.K. export optimism improved even more sharply in the second quarter to a value of +7 from -20 in the first quarter. It had a reading of -15 in the fourth quarter of 2023. U.K. economy is logging sharply improved numbers in the second quarter.

Dividing the quarterly responses into those that are topical or that show changes compared to the last three months, the average reading in 2024-Q2 rises to +5 from -2 in the first quarter and zero in 2023-Q4. The forward-looking survey elements for expectations or 3-month ahead conditions log an average reading of 12, up sharply from an average of +1 in 2024-Q1 and from zero in 2023-Q4.

The table presents diffusion data in the form of ‘up-minus-down’ responses. In the second quarter, there are only 6 net lower responses after logging 13 in Q1 and eleven in 2023-Q4. Five of the six net negative responses in Q2 are in the category for topical data or for three-month changes experienced while only one is for the expectations or 3-month ahead categories. ‘Net foreign orders 3-months ahead’ is the only forward-looking category that is still negative in 2024-Q2.

The quarterly data show a total of six net negative readings in Q2, 13-net negative diffusion readings in Q1, 11-net negative readings in 2023-Q4 and 6-net negative readings in 2023-Q3; compared to these quarterly metrics, the annual average shows 11-net negative readings based on average diffusion responses. Percentile standing data calculated from net diffusion readings back to 1980 show a headline standing in the 78th percentile in Q2; that is up strongly from the first quarter standing that is only at its 57.5 percentile. There are sharp ongoing improvements.

The expectations readings for the Cap-Ex surveys show a jump to the 90.4 percentile in Q2 from the 17.8 percentile in Q1 for buildings, and to the 63.7 percentile in Q2 from the 28.8 percentile for equipment spending expectations. In Q2 there are only four entries with percentile standings below 50% (below their respective median on data back to 1980); only one of those is for forward-looking data and once again it is for the outlook for foreign orders. In contrast, there are eleven entries below their 50th percentile standing based on the Q1 data illustrating the substantial improvement that has been made in one quarter The standings for new order and domestic orders are sharply higher in Q2 (but still below median). While foreign orders ahead also improve their standing in Q2, the margin of improvement is small.