Economy in Brief

German industrial output fell in December by 1.6%, extending the episode of continuous month-to-month declines to the last four months and making it part of a period of an eight-month stretch in which there were six month-to-month declines interrupted by two months when output was stagnant. This has been very difficult stretch for German industrial output. The country depends on its industrial sector for economic leadership and growth. Germany has been a significant exporting country. The war in Ukraine has severely disrupted the functioning of the German economy partly because Germany was also doing a good deal of business with Russia before the war began.

Industrial output trends German industrial output is falling sequentially, at a 3.1% annualized drop over 12 months, a 7.7% annualized drop over six months, and a 7.8% annualized drop over three months. Consumer goods and capital goods sectors show declines over each of these three horizons, but they don't show declines that are becoming sequentially worse. And both consumer and capital goods sectors show smaller annual rates of decline over three months than over 12 months. However, intermediate goods reveal a great deal of weakness as output falls by 4.6% over 12 months; that drop steps up to a pace of minus 15.9% over six months then the drop accelerates sharply over three months logging a minus 22.7% annual rate of decline.

Construction The construction sector has also been logging steady declines in output construction shows sequential and worsening declines in output, falling 1.4% over 12 months but dropping at a 25.5% annual rate over three months.

Other economic measures Manufacturing output shows worsening sequential declines, dropping by 3.9% over 12 months and contracting a 9.4% annual rate over three months. Real sales and manufacturing decline in all three horizons and the drop over three months at a 4.7% annual rate is greater than the pace of drop over 12 months which is kind of -3.4% pace; however, the decline in output in Germany is at a slightly slower pace over three months and over six months. Chair wheel manufacturing orders break this pattern of weakness showing a 2.1% increase over 12 months and a 20.4% annual rate of increase over three months, but this was propped up by some unusual aircraft orders the increase reflects a one- off event that isn't likely to be repeated.

Surveys of industrial activity or expected activity Surveys of the German economy from ZEW, the IFO, and the EU Commission show weakening trends. The EU Commission and the ZEW indexes are diffusion indexes that show negative values over all three horizons and values that are gradually worsening. The IFO constructs indexes and these show manufacturing weakening from 12-months to three-months as well as expectations that are weaker over three months than over 12 months, but they managed to improve slightly from what they averaged over six months.

IP snapshot from Other Europe Industrial production elsewhere in Europe is more mixed in December. French and Norwegian output rise while Spanish and Portuguese output falls. Sequentially French output is accelerating along with Portuguese output. Spanish output is decelerating, transitioning from a growth rate of -5.3% over 12 months to -20% at an annual rate over three months Norway fails to show a clear trend, but over three months output is up by 2.7% at an annual rate, better than its 0.9% gain over 12 months.

Quarter-to-date (completed Q4) In the quarter-to-date, all the German industrial production measures show industrial declines. Real manufacturing orders show a minor increase of 0.4% at an annual rate. Three out of four surveys weakened over the quarter, with the IFO manufacturing expectations the exception, which improves slightly. Quarter-to-date output changes for other European reporters show a decline from Spain, against a small 0.2% increase in France, a small 0.8% increase in Norway, and a substantial 12.9% annual rate increase from Portugal.

Historic assessments of performance The column on queue standings compares the various industrial measures to their appropriate measure of performance evaluated in the context of the last 24 years. Industrial production ranks in the lower 14.2% of its queue of growth rates over this period. The strongest industrial sector is capital goods and that has a 23.8 percentile standing, in the lower quartile of its historic queue of growth rates. Economic signals are weak for construction, for manufacturing, and for real sales; real manufacturing orders that have the distortion of one-time aircraft orders have a very strong 95.5 percentile standing. The various industrial surveys have standings that range from a low 5.2 percentile standing for manufacturing by the IFO, to a high 18.1 percentile standing for the EU Commission survey - all of these are quite weak standings. The growth rates of IP for the other four European countries show France above its median with a 55.1 percentile rank; Norway is close to its median of 50 with a 45.9 percentile rank. Spain and Portugal sport rankings in their 14.8- and 21.5-percentile, respectively.

Developed economy trends The OECD leading indicators for January show slight increases of 0.1% for the OECD Major 7 members. Japan shows a flat performance. The United States shows an increase of 0.1%. All of these top-of-the-table metrics are month-to-month changes. They follow identical month-to-month changes posted in January and December for each country or grouping.

Annualized growth rates for these metrics show growth rates over 12 months, six months and three months that reveal acceleration for the OECD 7 group as the 12-month growth rate is -1.9%, the six-month growth rate rises to 0.8%, and the three-month growth rate is a slightly-improved 1.0%. Japan logs negative growth rates for all three periods, but its three- and six-month growth rates are less weak than its 12-month growth rate. The U.S. shows acceleration with the 12-month growth rate at -1.9%, a six-month growth rate of 1%, and a three-month growth rate of 1.3%. The far-right hand column ranks these three OECD units on their index levels; all three regions stand below their respective medians which means they have rankings below the 50th percentile on data back to late-1999.

The OECD prefers to view the signals of its indicators over six months. The next panel on the table looks at changes in six-month averages. On this metric, six-month growth rates from six months ago, are positive for the OECD 7, for the U.S., and for China, while Japan posts a flat performance on this measure in January after rising in December. Sequential growth rates are presented to the right for six-month periods on a point-to-point basis for nonoverlapping rates of growth. The OECD 7 shows accelerating results. Japan shows mixed results. U.S. growth rates show acceleration and Chinese growth rates show acceleration. China’s growth rates are in sync with those from the U.S. The right-hand column offers percentile standings against six-month growth rates for data back to 1999. Each of the OECD metrics shows a standing above its median (which occurs at the 50% mark) except for Japan that has a 45.5 percentile standing. Japan scores as weak when the data are applied using different methods.

The bottom panel in the table presents levels of the OECD LEIs. The level ‘100’ represents normal growth; anything below 100 represents sub-normal growth. The table shows subnormal growth indicated everywhere except in the U.K., Japan, and China. However, the ratio of the current indexes to their value of six-months ago shows improvement everywhere except Japan; only France, the U.K., and China in this lower panel have queue standings for the LEI indexes above their respective medians (50% ranking).

On balance, the OECD indicators in January show some mild improvement underway with LEI indexes at weak levels but beginning to grow at a faster pace.

Stability settles in for the composite PMIs in January 2024. The average for all 25 members in the table is 50.5 in November; that rises to 51.1 in December and to 51.5 in January 2024. It’s a small set of increases, but the improvements offer a picture of stability. The overall metrics show an average of 51.6 for the composite PMIs over 12 months, which falls back to 50.8 over six months but then rises back to 51.0 over three months. This set of data confirms that these PMI gauges have been floating around in a narrow range for the past year. The medians for these same time periods also show a great deal of stability; there is some slight uptick over the last three months, preceded by considerable stability over 12 months, six months and three months.

PMI values vs. their queue standings The composite PMIs are a weighted average of the manufacturing and service sector PMIs for the various countries/reporters in the table. The average for all 25 countries is a queue standing of 48.7% on an unweighted basis while the median queue standing is a 46.9 percentile standing. The standings which are expressed in percentile terms should not be confused with the PMI gauges that are diffusion gauges expressed as all the rising observations plus half of the unchanged observations as a percent of the total number of observations in each country as reported by participants in each reporting region. With the queue standings, we look at the current PMI diffusion data that populate the table and rank them in their own history for each reporter. Queue standings are presented in only two columns differentiated in presentation with percent signs.

The table shows that in January there are 9 jurisdictions below a diffusion value of 50, which is the breakeven mark (dividing line between expansion and contraction) for the composite compared to 11 being below the composite of 50 in November and December. The number jurisdictions below 50 has fluctuated and a fairly narrow range with 8 averaging below 50 over 12 months, 10 averaging below 50 over six months and 9 averaging below 50 over three months.

Another metric of how conditions are evolving is to look at the changes period-to-period. On that metric, we see that nine of the 25 jurisdictions are slowing month-to-month in January and in December and those are smaller amounts than the 12 that were slowing in November compared to October. The 12-month average shows that there are 13 slowing comparing the 12-month average to 12-months ago. There are 18 slowing comparing over six months to the average over 12 months, marking the 6-month period as the period of the most intense weakness over this past year. Whereas looking at 3 months compared to 6 months, there are only 10 jurisdictions indicating slowing.

The far-right hand column creates percentile standings for all the metrics in the table over the last four years. Only ten of these jurisdictions show standings above the 50th percentile, marking only 10 as having standings above their medians for this four-year period. The average queue standing for these metrics is in the 48.7 percentile, while the median among these is at 46.9 percentile, a weaker figure. Fifteen of the jurisdictions currently are below their medians for the previous four-year period. This represents a reading below their four-year median standing.

On balance, these data depict a global economy that has been through a period of considerable slowing and weakness where conditions are beginning to stabilize and have been stabilizing to various degrees over the last year. The diffusion indexes, viewed broadly, suggest that contraction is somewhat prevalent but not common as there are many fewer jurisdictions below 50 and then above 50 on all horizons. Period-to-period slowing has also lost momentum; it reached its point of peak weakness over 6 months compared to 12 months and has since shed some of that weakening tendency. Percentile standings, however, mark the average and median readings as below their four-year averages and medians. The BIC countries excluding Russia are an exception with averages for their percentile standings at the 78th percentile. Meanwhile, the U.S., the U.K., and EMU regions have queue percentile standings in their 40th percentile, still quite weak. The large, developed countries continue to show some of the weakest performance during this time.

In this week's letter, we evaluate recent developments in Asia’ supply chains and trade. First, we analyze the consequences of ongoing disturbances in the Red Sea, observing a temporary reduction in freight and bunker fuel prices following their initial surges. Our discussion then turns to the potential effects of these developments on Asia, highlighting that supplier lead times have remained largely unaffected thus far. We further investigate the breakdown of geographical sources of imports for the region, pointing out that the predominance of intra-Asia trade could serve as a buffer against disruptions in sea routes elsewhere. We also expand our analysis to include a wider perspective on the semiconductor industry, recognizing Asia's contribution to the resurgence in global sales. Finally, we shed light on the varying growth rates of semiconductor exports among Asian countries.

Impacts of Red Sea disruptions so far The Baltic Dry Index (BDI), a composite of dry bulk shipping costs, surged to historic highs during the initial waves of Houthi attacks in early December (chart 1). That said, the index quickly normalized after sentiment stabilized and as shipment re-routings were underway. In contrast, the Drewry World Container Index (WCI), which captures shipping costs associated with eight major east-west routes, only surged in early January. The surge was driven by costs relating to routes that often require passage through the Red Sea (e.g., between Shanghai and western cities). Nonetheless, the WCI has already started to show signs of peaking, as prices moderated in early February.