Economy in Brief

The U.K. Distributive Trades Sector Struggles Quarterly data from the United Kingdom distributed trades survey for the fourth quarter show mixed results from participants although data are still quite clearly weak across the board and, when at their very best, are no better than neutral.

Distributive Trades: Retailing The distributive trades survey shows that imports improved in the fourth quarter to a reading of -6 from -15 in the third quarter. The four-quarter average has been around -11 so this is an improvement relative to the average. Capital spending for the year ahead also made some improvement in retailing to a -27 reading from -35 previously; however, that's still weaker than the four-quarter average of -24. The business situation expected over the next six months; however, deteriorated to -21 from -13 and that's much worse than the four-quarter average of -7. Inflation continues to be an issue in the U.K. although it is moderating. It may be an important reason the business situation is eroding. However, selling prices in the fourth quarter are weaker than in the third quarter at a +24 reading compared to +30 in the third quarter; however, that's a lower reading than the four-quarter average of +32. Employment expectations strengthened to -18 from -25 in the third quarter and that's better than the four-quarter average of -22, indicating some ongoing improvement, the survey on employment. Expected data show that price inflation is expected to be weaker at a +15 reading in the fourth quarter compared to +30 in the third quarter- this compares to a four-quarter average of +43 so inflation progress is being made. Employment expectations, however, are weakening at a -28 reading for the fourth quarter compared to -18 in the third quarter; compared to a four-quarter average of -16. The negative expectations for employment are getting worse.

Distributive Trades: Wholesaling Turning to wholesaling, reported imports are deteriorating, the opposite result that we saw for retailing, with a +7 reading in the fourth quarter compared to a +14 reading in the third quarter; however, the +7 reading is only a tick weaker than the +8 four-quarter average for imports. Capital spending is slightly improved in the fourth quarter compared to the third quarter although slightly weaker than its four-quarter average with a -15 reading for the fourth quarter and a -12 four-quarter average. The business situation expected over the next 12 months deteriorates sharply in the fourth quarter, falling to -12 from a +20 in the third quarter; those readings compare to a four-quarter average of +10, confirming that business expectations are a problem. The selling price for wholesaling ticked up in the fourth quarter to +14 from +12 in the third quarter, but that's significantly lower than the four-quarter average of +24. Inflation progress is being made but HICP data show that inflation, while better, continues to run at a pace above trend. Employment fell off sharply in the fourth quarter; the fall was to a net reading of zero after +14 in the third quarter; those metrics compare to a +9 reading over the last four quarters. Expected prices in the fourth quarter improved significantly (slowing their gain) to +11 from +31 in the third quarter and that survey compares to a +28 over four quarters. Employment expectations in the fourth quarter also declined to +11 from +18 in the third quarter, but they continue to sit on their four-quarter average.

Summing up The rankings are presented in the table and there are but two exceptions where rankings stand above the 50th percentile. Most readings stand below a ranking at the 50th percentile, which puts them below their historic medians calculated from data back to the first quarter of 1990. Only wholesaling imports at a 51.4 percentile standing and expected employment in wholesaling at a 70 percentile standing, have standings above their 50th percentiles. However, wholesaling employment trends over the past have a 49.3 percentile standing, fairly close to neutral, but everything else in the table shows numbers that are quite significantly below the 50th percentile, frequently and most commonly, below the 30th percentile standing. These are readings that have been weaker than their fourth quarter values less than 30% of the time for the most part. Some of them are much weaker than that. The U.K. clearly is experiencing difficulty. There's barely any evidence of any rebound in this survey and only a few categories are improving somewhat in the fourth quarter compared to the third quarter. None of this is very convincing on trend. The ranking data tell us the conditions continue to be extremely weak. The trends tell us that there's very little improvement and still much deterioration going on. It's a grim report for distributive trades survey from the United Kingdom for the fourth quarter. Wholesaling rankings stand broadly higher than those for retailing but without much meaning since both are so weak.

Covid slammed the global economy and hit Germany hard. But the German economy recovered as the chart shows. Then the Russian invasion of Ukraine occurred and sent a second, more lasting, shock wave across the German economy. Government restrictions during Covid were put on and then taken off. But the Russian invasion occurred as a shock and continues to play out disrupting European energy markets, trade, and trade patterns, as well as leaving heightened international tensions in play.

This month’s report includes a table column that ranks the IFO diffusion gauges across industries and concepts since the Russian invasion of Ukraine. The climate gauges are all low ranking on a 1991-to-date basis as well as ranked just since the invasion. Wholesaling, retailing, and services do rank slightly higher over the post invasion period than overall, but the ranking changes are not really meaningful. What these rankings point out is how weak conditions got after the invasion compared to historic lows and how substantially that weakness has persisted.

The current conditions index shows deterioration month-to-month for the overall (all-sector) reading as well as for two individual sectors (construction and services). However, the current rankings over data since the invasion are universally and substantially lower than the rankings made on data since 1991. The all-sector current index is on a post invasion low. Manufacturing, construction and services in the past invasion period are still extremely low.

What has fared better are expectations. The November expectations standing on data back to 1991, the overall ranking is at its 14.2 percentile. But ranking expectations since the February 2022 invasion shows that expectations have lifted substantially from the post-invasion lows with readings largely in the 60th to 70th percentiles. However, even with these rebounds, the overall ranking shows how extremely low the current reading stands in November.

Apart from the rankings, the all-sector diffusion readings are weaker in each of the three ranking environments of climate, current conditions, and expectations. Month-to-month expectations worsen for manufacturing, construction, and services even though those sectors show much higher rankings since the invasion compared to their overall rankings back to 1991.

These comparisons simply point out that there is little in the way of lasting improvement underway. Conditions are better relative to their median values since the invasion for expectations, but not for climate or current conditions. And despite this improved relative standing for expectations, the expectations readings are especially adverse and without an improving trend.

In this week’s letter, we focus on Southeast Asia (ASEAN). While exports have become increasingly important to ASEAN economies as drivers of real GDP growth, secondary growth drivers offer a buffer in the event of dampened external demand. A deeper look at the composition of ASEAN’s export value added reveals that intermediate goods account for the largest share, compared to finished goods. This highlights the region’s key role as a hub in the global supply chain. We also explore the differences among ASEAN economies. On the one hand, resource-rich countries like Indonesia and Malaysia benefit from their role as exporters of raw or partially processed commodities. On the other, resource-scarce economies like Singapore have carved out a niche in higher-end manufacturing, often relying on inputs from other regions.

Overall, ASEAN remains a bright spot for growth, with IMF forecasts suggesting that the region is poised to outpace other Asian economies, including China, over the next decade. However, the region’s prospects are not without risks. The US trade deficit with many ASEAN economies, particularly Vietnam, could provoke trade-related actions from US President-elect Trump. Ironically, Vietnam’s rise—largely driven by its strategic positioning amid US-China tensions during Trump’s first term—may also lead to increased scrutiny in his second term. Finally, we examine the industrial policies of certain ASEAN economies, particularly Indonesia. While the success of its nickel ore export ban is notable, similar export bans on commodities like bauxite have had more mixed success.

ASEAN’s place in trade and the world Trade has long been crucial to the economies of Southeast Asia (ASEAN), with export revenues serving as a significant driver of growth for several countries in the region. In recent quarters, this role has become even more pronounced, as evidenced in Chart 1, which shows rising export contributions to growth for Malaysia, Thailand, and Indonesia. In contrast, the Philippines continues to struggle to generate growth from its exports. However, unlike advanced Asian economies such as South Korea and Taiwan, many ASEAN countries have benefited from strong secondary growth drivers, particularly private consumption. A robust domestic consumer base has supported business activity across the region. This dynamic provides a buffer in times of reduced global demand, which may dampen export performance. Even if external conditions weaken, these economies may still rely on internal demand to sustain growth, provided their domestic situations remain stable.

Manufacturing readings fall by a 'tick' in November, but service sector metrics eased by nearly a full point on average. These calculations are for unweighted averages of the above observations. US trends are opposite, so that the overall averages become worse when the US is excluded.

In November the eight reporters in the table have stronger composite readings reported in only three countries, in Japan, India, and the US. The US is the only reporter in the table to show improvements in manufacturing, services, and for the composite at the same time, in November. The UK, France, and EMU each report increased weakness across the composite, the manufacturing sector and in services in November. Among the 24 readings across eight reporters (…and three sectors for each reporter) in November only nine of these twenty-four are stronger month-to-month. This compares to ten in October and eight in September. Weakness has dominated strength over the past three-months across these readings.

Sequentially we look at 12 month, 6-month, and 3-month averages of finalized data, we see only six of twenty-four stronger over three-months compared to 6-months, after the 6-month averages were broadly stronger showing weakening in only seven of twenty-four cases. Over 12-months there were only nine weakening compared to 12-months ago and they were all confined to three economies: Germany, France and Japan. The unweighted averages of these reporters show little change in the averaging of these sector reading over 3-months, 6-months and 12-months.

The queue rankings underscore the sense of weakness. Assessed among the most industrialized countries, the US is starting to gain separation as its service sector is carrying it to a better overall (composite) standing. The US composite standing is at 69.5% and compares to Japan, the UK, France, Germany and EMU whose highest standing for the composite among these five reporters is a reading of 42.4% -as the group produces an average standing at the 26.1%.

The US is still strongly ‘plugged into’ the global economy as its manufacturing sector is still the third weakest by queue percentile standing in the table. But the vibrant US services sector is the economy’s guiding light – plus manufacturing has improved for two months in a row. The global economy is still floundering while the US shows signs of strengthening.