Economy in Brief

GDP in the European Monetary Union in 2023 Q4 rose by 0.1% based on its early release. This small gain reverses the direction of GDP that fell by 0.5% in the third quarter of 2023. It helps to establish a positive growth rate over the last four quarters at 0.1%, after the third quarter posted a year-over-year GDP growth rate of zero.

EMU avoids year-on-year GDP losses- The European Monetary Union has avoided year-over-year declines in GDP since the first quarter of 2021. This early report is based in part on released data for seven monetary union members plus estimates. The four largest EMU economies: Germany, France, Italy, and Spain, posted a GDP gain, in the fourth quarter of 0.1% when grouped together. This is below the 0.3% gain they logged in the third quarter. These four countries provided a year-over-year GDP gain of 0.5%, up from 0.3% in the third quarter but lower than the previous two quarters. Based on this early data the rest of the monetary union -apart from these four countries - saw fourth quarter GDP rise by 0.3%, a reversal of their third quarter decline of 2.5% and it compares to a 0.1% quarter-to-quarter decline in the second quarter of 2023. The rest of the monetary union group’s GDP declined by 0.9% in the fourth quarter year-over-year the same as its year-over-year drop in the third quarter. These early and preliminary data demonstrate that the Big-4 economies in the monetary union are carrying the weight of pushing growth forward.

Optimism for global growth? However, none of this comes close to the U.S. where fourth quarter growth annualized GDP was up 3.3% after posting 4.9% in the third quarter. The U.S. GDP logs in at a 3.1% growth rate over four-quarters in 2023-Q4, up from 2.9% over four-quarters that was registered in the third quarter of 2023. The performance of the U.S. economy provides some backing and reason for optimism for the global economy looking ahead.

Percentile standings reveal a lot of under-performance- Additionally, we can evaluate the year-over-year GDP performance of the countries in the table by comparing current year-over-year growth to growth rates in the past. On this basis, the U.S. clearly has the strongest relative growth rate with the 75-percentile standing for its 3.1% growth rate. Portugal has a standing in its 64th percentile, above its historic median for the period (medians occur at the 50-percentiel mark). And Portugal is the only European Monetary Union member in the table with a GDP growth rate above its median. For the monetary union, the 0.1% growth in the fourth quarter has a 19.6 percentile standing. Among reporting members, the strongest standing (apart from Portugal) is Belgium with a 43.5 percentile standing, Italy with a 40.2 percentile standing, and Spain at a 38-percentile standing. The lowest standing is from Ireland with a 5.4 percentile standing; Germany has a 20-percentile standing and the French standing rounds to its 23rd percentile.

Ireland's economy is not doing particularly well; however, the consumer portion seems to be holding up better than expected. Nominal retail sales (excluding auto sales) in December rose by 0.8% while real (ex-auto) retail sales rose by 0.3%. The inflation adjusted series rose by 1.9% over 12 months, fell at a 3.3% annual rate over six months and rose at an annualized rate by 5.1% over three months.

The nominal figures get the most notice, but of course, we are mostly concerned with sales in real terms.

In real terms, Irish sales (excluding motor vehicles) are up at a 3.9% pace in 2023-Q4 (in the just completed quarter for retail sales data). Food & beverage spending is up at a 3.7% pace. Clothing & textile spending is falling at a 5.5% annual rate. Total retail sales volumes are falling at a 0.8% annual rate in the fourth quarter.

In this week’s letter, we examine China and India – the world’s two most populous economies. We first take stock of developments in monetary policy, noting China’s continued inclination toward more easing while India keeps policy tight to contain inflation. We also note, however, still weak credit demand in China despite recent easing moves, and strong loan growth in India despite recent tightening moves. We look next at equity market performance in these two economies, noting the divergence between investor pessimism about China and continued optimism regarding India. Next, we assess longer-term demographic issues, highlighting China’s challenges with a rapidly aging population, in stark contrast to India’s relative youth. We end this week’s discussion with a shift to the advanced Asian economies of Taiwan and South Korea, noting persistent manufacturing weakness in the former. And we give a nod to the significance of semiconductors in these economies’ exports, acknowledging, in particular, their recent rebound in South Korea.

Monetary policy in China and India The People’s Bank of China (PBoC) cut the one-year medium-term lending facility (MLF) rate by 45 bps over 2022 and 2023 (chart 1) to support a struggling Chinese economy. The MLF rate cuts in turn dragged on the one-year and five-year loan prime rates (LPR), which serve as reference rates in the credit market. More recently, the PBoC announced that it will cut the reserve requirement ratio (RRR) for banks by 50 bps, effective 5 February. The central bank’s governor said the move will unleash about 1 trillion yuan ($140 billion US dollars) of liquidity into China’s financial system. The PBoC has already enacted numerous RRR cuts in recent years, in a bid to boost growth by easing monetary and credit conditions. It remains to be seen, however, if the latest easing moves can alleviate the challenges China currently faces, given the structural roots of China’s economic problems.

In contrast, the Reserve Bank of India (RBI) has pursued policy tightening over recent years, having raised policy rates by 250 bps to combat inflation. As a result, India’s policy repo rate and marginal standing facility rate have been lifted to late-2018 levels, of 6.5% and 6.75% respectively. Also, the standing deposit facility rate was lifted to 6.25%. India, like many other emerging Asia economies, has experienced price pressures from food and energy costs, prompting the RBI to raise interest rates.