Economy in Brief

Ireland continues to produce good inflation news in April. The HICP index rose by 0.1% in April logging a 1.6% increase from a year ago, well within the target set by the European Central Bank for inflation in the entire Monetary Union. Ireland also reported a 0.3% increase in April for its domestic CPI gauge; that gauge is up 2.8% over 12 months. Ireland's CPI core fell by 0.1% in April and it's higher by 3.5% over 12 months. The annual rate difference between the inflation rate for the European Monetary Union inflation index known as the HICP, and Ireland's domestic CPI appears wide at 1.6% versus 2.8%; yet, both year-over-year changes are at 33-month lows. The domestic CPI core inflation rate is at a 27-month low. While these three gauges measure inflation in slightly different ways, it's quite clear that for the measure that each chooses to assess inflation, each has made a substantial reduction from where it has been and that all three gauges are showing substantial as well as ongoing inflation progress.

Different metrics but tracking the same forces However, since Covid stuck, the differences between the core and the HICP and HICP and CPI have become magnified. Much of that is because of the growing difference in inflation lags and developments between the core and the headlines when inflation accelerates due to different causes. Still, the CPI headline and the HICP headline are more inconsistent than they were prior to August 2021. In the earlier period, there would be a standard deviation between the headline readings of annual inflation of 0.2%; that has grown to 0.6% after August 2021. However, the difference has shown signs of declining recently. The correlation between the headline HIPC and core has actually improved in the Covid period. This reinforces the belief that inflation is a singular force being tracked by both methods with differences stemming from their methodologies and weights rather than there being different underlying inflation dynamics at work.

Sequential results Sequentially the ECB inflation measure, the HICP, rises by 1.6% over 12 months, falls at a 0.5% annual rate over six months and then rises at a modest 1% annual rate over three months. The Irish CPI gauge shows at a 2.8% year-over-year increase, a 0.6% annual rate rise over six months and a 1.6% annual rate gain over three months. Ireland's CPI core rate rises 3.5% over 12 months, at a 1.6% annual rate over six months and at a 2% at an annual rate over three months. All three gauges show six-month inflation below 12-month inflation as well as 3-month inflation higher than 6-month inflation but also 3-month inflation below the pace of its 12-month gain. So once again, we can look at different inflation measures and the absolute reading on inflation is going to be different depending on what we mix into the pot. Regardless of that, it appears that the overall inflation pressures in Ireland are consistent and behaving in a similar fashion regardless of which of these metrics we look at.

Inflation across categories The diffusion gauge for the domestic CPI, which looks at accelerations across the CPI categories, marks accelerations as the value of 1 and unchanged inflation as the value of 0.5. Summing these and presenting them are proportional results, produces a diffusion rating at 50% when inflation is accelerating and decelerating in equal proportions, a value above 50% when inflation is accelerating in more categories, and a value of below 50% when inflation is decelerating in more categories. Inflation diffusion for Ireland is at 33.3% over 12 months, 33.3% over six months, but rises to 54.2% over three months. This calculation shows us that 12-month inflation compared to 12-months ago is decelerating in nearly 70% of the categories; that, over six months compared to 12 months, inflation is also still decelerating in nearly 70% of the categories. But, over three months, the inflation rate accelerated in slightly over half of the categories. And that's not surprising. Look at how the headline inflation rate for the CPI and for the core performed over this period. Although the diffusion calculation doesn't necessarily agree in all cases with changes in the headline diffusion and the weighted inflation headlines show the same trends. Diffusion is a separate measure that looks at the breadth of the inflation trend by assessing whether inflation is rising or falling across the various categories and then toting up the results. The diffusion measure neither looks at the magnitude of the change in inflation nor imposes any weight across the categories; it is simply looking at the change in inflation across various categories.

German industrial production was strong in January and February but March brough a setback as IP slipped back by 0.4% month-to-month. In March, month-to-month IP fell in all major IP categories except capital goods where it edged ahead by 0.1%.

Sequential trends Sequentially, German IP shows signs of life and of acceleration. The month’s small setback has not reversed that, but since it is an early setback in a process of recovery that is long overdue there is some skepticism about whether the rebound will be sustained. Persisting acceleration is exhibited in the headlines and in all three key sectors. Still, the year-on-year change shows a net drop for the headline and all components. Capital goods still show net output declines on all horizons.

Trends year-on-year Year-on-year consumer goods trends (see data plot) show a somewhat sharper move upward in growth rates while intermediate goods show a slow crawl higher – in both cases this means slower year-on-year declines in train. Capital goods trends show less recovery with only a recent bounce from a deep, 6.2% year-on-year decline, logged in January of this year.

Quarter-to-date The QTD trends show strong gains across components and for the IP headline – the exception is capital goods where output is still falling at a 6.3% annual rate, even with all this pickup in activity around it. The failure of capital goods to join the rebound parade is another reason to remain cautious about embracing the notion of the sustainability of the rebound.

Other IP assessments There is a column of queue standings that rank the year-on-year growth rate on annual data over the last 24 years. This ranking produces a standing in the 14.5 percentile for IP overall and sector standings that rank from 39% to 11%. Next, evaluating IP gains from before Covid in January 2020 to date, leaves us with an empty house. There are no net gains! All sectors show the level of IP in March 2024 -a hearty four-year period – containing some major and minor cycles, a sucker punch from Covid and the Russian attack on Ukraine – at lower levels. German industrial output overall and across sectors is weaker on balance and with unclear momentum. Statistically the momentum looks good right now, but it still must show its sustainability.

Other German manufacturing metrics Manufacturing output on its own follows the same script as for overall IP. However- ominously- real manufacturing orders do not. They show the opposite case, an implosion of sequential growth rates culminating in a drop at a nearly 40% annual rate over three months. Real sales also show a steady diet of declines without much trend but with their weakest reading over the more recent period. The queue standings of the annual growth rates are low.

German surveys The monthly survey results are a mixed bag of monthly trends. The sequential averages, however, show a trend to deterioration of all four industrial metrics, save one (IFO manufacturing). QTD the survey results are split. The queue standings of the surveys are uniformly weak in the ranking range of 10-15-percentile…quite weak.

Other Europe MFG IP Other Europe presents a split view. Monthly data for the four European nations in the table are mixed. Trends from 12-month to 6-month to 3-month are showing acceleration for Spain and Portugal vs. a clear trend to deceleration in France. Norway, a non-EMU country, shows unclear trends but only exhibits an output decline over 12 months. However, the IP standings for the four European nations in the table all are superior to Germany’s. Germany traditionally is the European powerhouse on this metric. Remember this is an individual ranking metric; it does not rank countries against one another. Germany’s own ranking is 14.5%, Spain’s own ranking is 77.7%, France and Portugal have mid 40-perentile rankings, while Norway has a 37-percentile ranking. Comparing each to its own normal performance over the last 24 years, all countries are doing better than Germany. Not surprisingly, German output has fallen by 8.7% since January 2020 compared to a net 4.6% drop for France, a net 2.8% drop for Portugal, a net 0.9% drop for Norway, and an 8.1% rise for Spain. Europe is not operating as it has in traditionally normal times. Covid and the Russian invasion have turned Europe on its head…and it is still there, despite some early signs Germany may be mounting a recovery.

Real German orders fell by 0.4% month-to-month in March after falling by 0.8% month-to-month in February. These two declines followed a much larger 10.9% drop in real orders posted in January of this year. Foreign orders in March rose by 2% after falling by 2.2% in February and falling by 10.8% in January. Domestic orders were basically on that same roller coaster, falling by 3.6% month-to-month in March after rising 1% in February and falling by 10.9% month-to-month in January. January was a tough month for German orders no matter where you look; since January, there hasn't been any recovery in German orders.

Sequential Real Orders But the sharp drop in orders in January, just three months ago, sets the stage for the three-month annual rate in orders to decline sharply; it falls at a nearly 40% annual rate compared to a 5.9% annual rate decline over six months and a 1.7% decline over 12 months. Foreign orders and domestic orders show similar progressions as you can see in the table. With the extra drop over three months, it does not make much sense to dwell on whether the declining pattern is sequentially enabled or not.

Real Sales Real sales by sector are less affected by whatever machinations are buffeting orders. Sales across categories fell in March after posting a full slate of monthly gains in February. That followed a near-full-slate of declines in January, with consumer nondurables an exception to the weakness and one that showed enough strength to boost overall consumer goods sales to a gain as well. Sequentially real sector sales show declines on all horizons, a series that barely escapes showing progressive weakness but annualized sales over three months are weaker than sales over 12 months.

Q1 Assessment March completes the orders and sales data for the first quarter; that finds orders falling at an 11.3% annual rate with similar drops for both domestic and foreign orders. Real sector sales in the quarter fall at a 1.8% annual rate on declines across categories except over all consumer sales and consumer nondurable goods sales.

In this week's letter, we examine recent developments in China. We first take a pulse on the economy, with a nod to its consensus-beating real GDP performance in Q1. We note, however, some signs of weakening momentum, and, most notably, some disappointing industrial and retail sales readings seen for March. As such, it remains to be seen if the economy is conclusively out of the woods, especially when pockets of weakness remain. We analyze next some trends in China’s tourism space, which has seen a pickup in international air travel volumes, likely boding well for tourism-reliant economies in Asia. We then investigate export trends in the broader Asian region in relation to China. Here, we notice a mixed landscape: while some economies like Japan have reduced their export dependence on China, others, such as Vietnam, are seeking deeper economic integration. Lastly, we delve into shifts in cross-currency relationships, observing a decline in the correlation between yuan-yen and yuan-baht returns, among other notable trends.

We deduce from the recent developments that China’s recovery, whilst still underway, remains uneven and not yet set in stone. Nonetheless, China’s tourism sector continues to strengthen, initially in domestic travel and more recently in international trips. Moreover, beneath the interim recovery lies shifts in economic relationships with other Asian economies, relating to both export dependence and to currency moves.

China’s recent economic results China continues to be focal point for global investors, given its potential impacts on the world economy. The domestic economy posted better than expected real GDP results for Q1, with growth accelerating to 5.3% y/y during the period. The impulse came from net exports, which contributed to growth for the first time in six quarters. Looking at China’s March data, however, we saw rather disappointing results from its industrial and retail sector as growth rates slowed towards the end of the quarter (Chart 1). Hence, while China’s January and February figures offered some hope of economic stabilization, its more recent dataflow for March now raise concerns about weakening momentum.