Economy in Brief

In this week’s Letter, we examine why the continuing oil shock is placing renewed pressure on several Asian currencies—and why the mechanisms differ significantly across economies. The US–Iran conflict shows no meaningful sign of abating, with further strikes exchanged earlier this week. Meanwhile, shipping through the Strait of Hormuz remains severely disrupted (chart 1), effectively putting a floor beneath crude prices. The resulting increase in energy costs is sustaining inflation risks and worsening the terms of trade for oil-importing economies. This has contributed to the weakness of both the yen and the rupee this year, although energy dependence is only part of the explanation (chart 2). Unfavourable interest-rate differentials remain the principal constraint on the yen, while portfolio flows have amplified the rupee’s decline. Pressure on the Indonesian rupiah, by contrast, owes more to concerns about domestic politics and fiscal credibility. Although broad dollar strength is often blamed for the region’s currency weakness, our trade-weighted nominal dollar index has moved largely sideways.

India’s vulnerability to the oil shock is particularly pronounced. Domestic crude production covers only a small share of consumption, leaving the economy highly exposed to movements in global prices (chart 3). South Korea, Japan and Taiwan face similarly heavy import dependence, while the headline figures for China probably understate its underlying exposure. For India, however, a deteriorating energy bill has coincided with financial-account pressure. Portfolio investors withdrew capital for an extended period after conflict erupted in late February (chart 4). These outflows subsequently reversed after the RBI introduced incentives in June to attract dollar deposits—measures that proved effective enough to be withdrawn ahead of schedule. Nevertheless, the rupee has recovered little of its earlier decline. Indonesia presents a different risk profile. Investor unease centres less on oil-import dependence than on the direction of fiscal policy and the broader political environment. Foreign ownership of rupiah-denominated government bonds has fallen below 13%, even as the outstanding stock of debt has continued to expand (chart 5). President Prabowo’s USD 230bn budget for 2027 targets a smaller deficit (chart 6), but it remains unclear whether this will be sufficient to restore investor confidence.

The oil situation There is little sign of a substantive let-up in the US-Iran situation. Both sides exchanged strikes earlier this week, the first such exchange in about a month. Absent the strikes, the underlying economic reality remains broadly unchanged. Shipping traffic through the Strait of Hormuz has remained weak (chart 1), leaving an implicit floor under crude oil prices. Upside inflation risks stemming from energy therefore remain alive, and with them the implications for monetary policy. Beyond inflation, this protracted bout of elevated oil prices continues to add to the hefty bills faced by net energy importers, in the region and well beyond it.

Growth among the eleven reporting EMU countries continues to be mixed. Growth in EMU is stable enough but modest at 0.5% to 1.2% over four quarters when assessed over the last four quarters. Quarterly results are more volatile, of course. Median annual growth is 1.3% to 2.1%.

Mixed Result on Growth In Q2, five of these eleven countries showed lower growth based on annualized quarter changes, while three showed weaker growth quarter-to-quarter based on four-quarter rates of growth. Belgium, Denmark, and France were weaker based on four-quarter growth rates. Growth in Spain was unchanged at 2.7%. Danish growth slowed to 4.6% from 6.1%.

Assessing Rates of Growth The change in growth rate assessment is useful but never quite definitive, as you can see from the still-strong, although slower, Danish pace of growth. 4.6% is less than 6.1%, but it is still quite strong, hardly a problem. Similarly, Ireland shows better growth, but that is an ‘improvement’ to -5.6% from -13.2%, an improvement and a sharp one, but still chillingly weak. Of course, Ireland, with a preponderance of multinational corporations headquartered there, shows some accounting fluctuations that are not that representative of a real macroeconomic impact on the Irish economy but can have a big impact on reported GDP. Ireland logs the only negative growth rate in the monetary union over four quarters, with Belgium the next weakest at 0.5%, and Germany and Italy at 1%.

The Big Four Economies The four largest EMU countries with GDP pooled have run an annual growth that has been quite steady around the 1% mark (0.9% to 1.1%). The rest of the EMU has had a more volatile growth rate. Pooling the remaining countries’ GDP performance yields growth rates over fourth quarters ranging from -0.9% to +2.1% over the last four quarters.

Within EMU The table chronicles growth rates for 11 EMU members plus the United Kingdom, the United States, and Japan. Among these 14 countries, year-over-year growth rates on data back to 1998 show only five countries with GDP growth rates ranking over four quarters above 50%; rankings above 50% put them above their median for that period. Those five countries are Spain, Finland, Italy, Portugal, and Denmark. While Spain and Italy have rankings above their medians for the period, German growth ranks at only 45.7%, and French growth is quite weak at a 17.4 percentile standing, marking a split in performance among the Big Four economies.