Louise Curley

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<p>The IFO indexes of business conditions and expectations in Germany declined further in April as heralded by the ZEW indicator of market sentiment, released last week.</p>
<p>The respondents to thesurvey have become more pessimistic regarding their expectations than regarding their current conditions since April of 2004 as shown in the first chart where the year-to-year changes in expectations and current conditions are plotted.</p>
<p>Other confidence measures released recently include Belgium&#39;s BNB (Banque Nationale de Belgique) indicators of business and consumer confidence, both of which declined in April. The only bit of optimism, surprisingly, was shown in Italy&#39;s ISEA (Instituto Nationale de Statistica) index of consumer confidence which increased by 0.58% from March and 3.05% from April, 2004. The year-to-year changes in this measure are shown in the second chart together with the year-to-year changes in Belgium&#39;s measure of consumer confidence. Italy&#39;s consumers have, so far this year, shown positive changes from the corresponding months of 2004 while Belgium consumers have become negative.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050425d.jpg" width="353"><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050425c.jpg" width="353"></p>
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<th scope="col" class="firstcol"><b><a href="http://www.haverselect.com/dlx/INDUSTRIALDETAIL.HTM">Euro-Zone countries:</a></b></th>
<th scope="col"><b>Apr 05</b></th>
<th scope="col"><b>Mar 05</b></th>
<th scope="col"><b>Apr 04</b></th>
<th scope="col"><b>M/M %<br> &nbsp; or Dif</b></th>
<th scope="col"><b>Y/Y %&nbsp;<br> or Dif</b></th>
<th scope="col"><b>&nbsp;2004&nbsp;&nbsp;</b></th>
<th scope="col"><b>&nbsp;2003</b></th>
<th scope="col"><b>&nbsp; 2002</b></th>
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<td class="firstcol"><b>IFO Index (2000=100) Germany</b></td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
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<tr>
<td class="firstcol">Business Climate</td>
<td>93.3</td>
<td>94.0</td>
<td>96.4</td>
<td>-0.74</td>
<td>-3.22</td>
<td>95.7</td>
<td>91.7</td>
<td>89.4</td>
</tr>
<tr class="odd">
<td class="firstcol">Business Conditions</td>
<td>93.1</td>
<td>93.3</td>
<td>95.0</td>
<td>-0.21</td>
<td>-2.00</td>
<td>94.0</td>
<td>88.4</td>
<td>85.3</td>
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<td class="firstcol">Business Expectations</td>
<td>93.6</td>
<td>94.6</td>
<td>97.8</td>
<td>-1.06</td>
<td>-4.29</td>
<td>97.4</td>
<td>95.1</td>
<td>93.8</td>
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<td class="firstcol"><b>BNB % Balance</b> <b>Belgium</b></td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
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<td class="firstcol">Business Confidence</td>
<td>-11.6</td>
<td>-8.0</td>
<td>-0.6</td>
<td>-3.6</td>
<td>-12.2</td>
<td>2.3</td>
<td>12.9</td>
<td>7.9</td>
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<td class="firstcol">Consumer Confidence</td>
<td>-5</td>
<td>-2</td>
<td>-4</td>
<td>-3</td>
<td>-1</td>
<td>-4</td>
<td>-11</td>
<td>-2</td>
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<td class="firstcol"><b>ISEA (1980=100) Italy</b></td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
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<tr class="odd">
<td class="firstcol">Consumer Confidence</td>
<td>104.8</td>
<td>104.2</td>
<td>101.7</td>
<td>0.58</td>
<td>3.05</td>
<td>100.4</td>
<td>106.8</td>
<td>115.8</td>
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The IFO indexes of business conditions and expectations in Germany declined further in April as heralded by the ZEW indicator of market sentiment, released last week. The respondents to thesurvey have become more pessimistic regarding [...]

Confidence in the Euro Zone: Lower in Germany and Belgium But a Surprise Rise in Italian Consumer Confidence

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Tian Yong Woon

In this week's letter, we look at direct investment flows across Asian economies. We find that there has been a discernible decline in foreign direct investment (FDI) across several economies in the region in recent quarters. This dip in investment activity can be attributed to various factors, including shifts in investor sentiment towards the recipient economies.

Additionally, we explore outbound direct investment flows from these economies. Hong Kong remains the primary intermediary for mainland China's investment flows, underscoring its crucial role in facilitating cross-border investments. Conversely, Japan, boasting the world’s largest stock of net international assets, maintains a strong preference for the United States as its favored investment destination. This preference underscores the enduring ties and strategic partnerships between the two nations.

Finally we shift our focus to scrutinize specific economies in Southeast Asia, where we observe a noteworthy recovery in FDI inflows following the pandemic. We find that investor interest in pivotal themes such as the energy transition and the digital economy has played a vital role in propelling these flows. We note, nevertheless a slight retracement in these flows in 2023.

**China**
Foreign direct investment (FDI) in China has plunged in recent months, based on the standard measure adopted by the Ministry of Commerce. Monthly actual utilized FDI has consistently shown double-digit year-on-year declines throughout the year so far, with the contraction worsening to 38.2% in March (Chart 1). Additionally, China’s direct investment liability flow plunged to under 300 billion yuan in 2023, from 1.25 trillion in 2022. Analysts attribute China’s FDI declines to various factors, including domestic growth risks and ongoing tensions with other countries, such as the United States. However, the impact on growth may be nuanced, as business investment within China is predominantly domestically sourced. The outlook on China’s broader economy however, remains uncertain, with April’s economic data presenting a mixed picture. Specifically, growth in retail sales and fixed asset investment slowed further in April, while industrial production logged an unexpected growth rebound. 

240520T1.jpg

There have not been major changes, however, in the destinations of direct investment flows from mainland China. Hong Kong remains the primary initial recipient, accounting for nearly 60% of these flows in 2022, as shown in Chart 2. Similarly, a significant portion of Hong Kong’s outbound FDI (59.3% in 2022) is directed towards mainland China. This data highlights Hong Kong’s role as an intermediary, with mainland firms often establishing a presence in the region to facilitate access to overseas markets. More broadly, Hong Kong continues to serve as China’s gateway to the rest of Asia and the world.

240520T2.jpg

**Japan**
Japan holds the world’s largest stock of net international assets, valued at approximately $3.4 trillion as of the end of 2023. This figure significantly surpasses those of other developed economies, such as the US and the UK, which, in contrast, maintain net international liability positions. Japan’s substantial net holdings of international assets are the result of decades of accumulating outward FDI and portfolio investments. The economy is one of the world’s main sources of outward FDI, having invested about 25.7 trillion yen ($183 billion) in 2023, as shown in Chart 3. The US has often been the main recipient of Japan’s direct investment flows, followed by the European Union and Southeast Asia. 

240520T3.jpg

By broad sectors, most of Japan’s outbound direct investment continues to flow into non-manufacturing sectors. However, the share directed toward manufacturing has steadily increased in recent quarters, as illustrated in Chart 4. The pickup in manufacturing investment was driven by flows to chemical and pharmaceutical firms in the US, and to food sectors abroad. Meanwhile, investment in non-manufacturing sectors fell in Q4 2023, mainly due to outflows from finance and insurance over the period. Regardless, Japan’s asset accumulation has proven beneficial in recent years, particularly during periods of yen depreciation. The benefit arises from foreign assets denominated in non-yen currencies, where gains are seen through favorable currency effects even if the actual non-yen value remains unchanged.

240520T4.jpg

**Select ASEAN economies**
Focusing next on select economies in Southeast Asia, specifically Indonesia, Malaysia, Thailand, and the Philippines, we observe a normalization of FDI flows in recent quarters. FDI flows to the region took a hit during the pandemic, but quickly recovered as the world started to reopen. The recovery was driven by investment spikes in the manufacturing and information & communication sectors, and moderate investment growth in finance and trade. Underpinning investment growth was increased investor interest in the energy transition (e.g., electric vehicle-related products) and the digital economy (e.g., data centers), among other factors. While most of the FDI flows were from new capital, much of the flows also stemmed from reinvested earnings, signaling investor commitment to the region. FDI flows into the region have, however, retraced following their initial spike, as shown in Chart 5.

240520T5.jpg

Delving deeper into the drivers of FDI flows, the table in figure 6 reveals that a significant portion of these economies’ inflows originates from their Southeast Asian peers. Specifically, about one-third of the inward FDI comes from the broader ASEAN region. Additionally, around one-quarter of the flows are from mainland China and Hong Kong, highlighting the crucial role of the Chinese economy. Examining the economy-specific drivers of recent FDI declines, we observe that Malaysia’s drop in 2023 was driven by a slump in investments from the US. In contrast, Thailand’s FDI decline mainly resulted from reduced inflows from other ASEAN economies.

240520T6.jpg

Asia

Economic Letter From Asia: Know the (FDI) flows

Tom Moeller

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The U.S. Leading Economic Index fell 0.6% (-5.4% y/y) during April following an unrevised 0.3% March decline, according to a report by The Conference Board. These two changes followed a 0.2% February improvement. A 0.3% April shortfall had been expected in the Action Economics Forecast Survey.

Five of ten components contributed negatively to the overall index in April including the ISM new orders index, building permits, stock prices, the spread between the 10-year Treasury and the Fed funds rate, as well as consumer expectations for business/economic conditions. Initial claims for unemployment insurance and the leading credit index contributed positively. New orders for capital goods and new orders for consumer goods made minimal positive contributions to the index change while the length of the average workweek had no effect on the leading index change.

A 0.2% April increase in the Coincident Economic Index followed a 0.2% March gain, revised from 0.3%. These gains came after a 0.3% February rise. Three of the four components made positive contributions to the coincident index in April, including the changes in personal income less transfers, nonagricultural payroll employment and real manufacturing & trade sales. The change in industrial production had no effect on the coincident indicators.

The Lagging Economic Index rose 0.4% (1.4% y/y) after unrevised stability in March and a 0.2% February increase. Three of the index’s seven components made positive contributions last month including the average duration of unemployment, commercial & industrial loans outstanding and the ratio of consumer credit to income. The six-month change in unit labor costs made a minimally negative contribution while the six-month change in the services CPI, banks’ prime rate and the ratio of business inventories-to-sales were unchanged.

The ratio of the coincident index to the lagging index is also viewed as a leading indicator of economic activity. This measure fell 0.2% in April, following two straight monthly increases. It was 0.8% below its most recent peak in December of last year.

The Conference Board figures are available in Haver's **BCI** database; the components are available there, and most are also in **USECON**. The expectations are in the **AS1REPNA** database. Visit the Conference Board's [website](https://www.conference-board.org/us/) for coverage of leading indicator series from around the world.



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- Leading index decline is largest in six months.
- Coincident Indicators continue to increase moderately.
- Lagging index strengthens after holding steady.


U.S. Leading Economic Indicators Fall Sharply in April

Robert Brusca

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**EMU Inflation Trends Offer Hope and Hype**- Inflation in the European Monetary Union rose by 0.2% month-to-month in April, the same as in March. Core inflation, however, picked up, rising by 0.4% but that was after being flat in March. The sequential growth rates from 12-months to six-months to three-months show the headline inflation rate at 2.4% over 12-months falling to 2% over 6-months, then rising to a 3% annual rate over three-months. The core rate for the monetary union rose 2.9% over 12-months at a 2.7% annual rate over six-months, it steps up to a 2.8% annual rate over three-months. Headline inflation is resisting moving down to the 2% level consistently while core inflation appears to be stuck just short of 3%. Whether these trends are good enough depends on whether the ECB sees itself implementing precision-guided policy or playing horseshoes and hand grenades.

**Headline Inflation: four largest EMU members**
Statistics for the largest four members of the monetary union show inflation worse in April on balance than for the monetary union as a whole. German inflation rose by 0.8% in April, in France it rose by 0.7%, in Spain at rose by 0.5%, while in Italy it rose by 0.3%. These are month-to-month gains. However, these figures followed either flat or declining inflation (price-) performance in March for each of these four countries. The progression of inflation for Germany, France, Italy, and Spain, however, still shows inflation resisting a consistent move down to 2%. German inflation runs at 2.6% over 12-months steps up to 2.7% over 6-months and reaches a 2.9% annual rate over 3-months. France’s 12-month inflation of 2.4% steps down to 2.2% over 6-months, then rises to a 3.2% annual rate over 3-months. In Italy, headline inflation is 1.1% over 12-months, similarly at a 1% annual rate over 6-months, then rises to a 1.7% annual rate over 3-months. Spain's inflation falls from 3.6% over 12-months to 3.2% over 6-months to 2.3% over 3-months- finally a European Monetary Union large country member with persistently decelerating inflation! On balance Italian inflation over 3-months is under the target that the ECB has for the monetary union as a whole, Spain’s inflation is transitioning from 12-months to 6-months to 3-months down close to the 2% mark, while Germany and France continue to show stubbornly too-high results for their headline inflation rates. All-in-all, that is not a great background to support a rate cut.

**Core inflation and its trends offer hope**
Core inflation rates produce much more beneficial results. Still, in April month-to-month core inflation increases are generally excessive for these four members. But that follows declining inflation – falling prices- for core rates in March. Germany is an exception to this pattern, but it still follows the rule of improvement because its inflation progress is flipped between the two months. Looking at sequential growth rates for core inflation or ex-energy inflation for these large country members, we find that inflation is persistently decelerating from 12-months to 6-months to 3-months for all of them except for France. France shows a pickup in inflation over 3-months compared to 6-months as core inflation rises to a 3-month rate of 2.9% after posting a 2.1% pace over 6-months. The 3-month pace for inflation x-energy for Germany is 2.1%, the core for Italy is at 1.7%, and the core for Spain is at 1.8%. All three-monthly core rates are at the doorstep or within the ECB's target range for headline EMU inflation. France is the exception. The 12-month core inflation rates are all above target but show signs of coming into line; German and French year-over-year inflation rates decline in April compared to March the Italian rate is unchanged year-over-year at 2.3% on the monthly comparison, while only Spain has an acceleration compared to a month ago and that's to a 3.3% rise from 3.1% in March.

**Is it good enough?**
The speed of inflation’s drop- Core inflation rates would seem to build a good enough base for the ECB to move ahead with rate cuts if it decides it wants to go that way. If it wants to be surer and clearer about reducing inflation it will pay more attention to the headline rates that are excessive- especially since no inflation metric is falling particularly fast anymore. The risk over ‘overshooting’ on the downside seems remote. Oil prices as measured by Brent in euros rose by 4.3% month-to-month in April after rising 1.6% in March. However, year-over-year Brent prices are down by 3.3%, so the impulse from oil is mixed across tenors. 

ECB credibility- A different view of reality looks at ECB inflation performance over five-years and finds all the metrics quite unacceptable. Over the last five years the compounded inflation rate for the monetary union is 3.7% and for the core it's 2.8%. For Germany it's 4.1%, for France it's 3.3%, and for Italy and Spain it's 3.4%. The core or X energy inflation rates do not behave much better, Germany is at 3.3% over five years on its core measure, France at 2.7%, Spain at 3%, and Italy at 2.5%. If the ECB is concerned about its credibility, then it's going to want to make sure that it gets inflation down inside of its target soon because the five-year compound inflation rates are so far over their target that clearly a central bank that claims to target 2% inflation cannot look at that five-year record and consider policies to have been a success. 

**Driving the road ahead**- Looking ahead it's very possible that inflation is on a downtrend and that policy is moving inflation in the right direction; the question remains concerns the certainty of that conclusion and the question ‘is inflation moving down fast enough?’  The ECB is going to have to measure the impact on its credibility against its desire to hit its inflation target in the short run and pay some attention to the effect that policy has on economic growth rates in the monetary union. On that score, unemployment rates throughout the European Monetary Union are still extremely low in historic comparisons… but, there has been a new sensitivity across central banks globally as they try to reduce their inflation rates ‘to target levels’ without having much impact on the unemployment rates at all - even though unemployment rates are in many places near some version of historic lows. Time will tell whether this sort of prevarication in inflation fighting that coddles the unemployment rate that is already so low is wise or has turned out to be foolhardy. 


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Europe

EMU Inflation Trends Offer Hope and Hype- Inflation in the European Monetary Union rose by 0.2% month-to-month in April, the same as in March. Core inflation, however, picked up, rising by 0.4% but that was after being flat in March. The sequential growth rates from 12-months to six-months to three-months show the headline inflation rate at 2.4% over 12-months falling to 2% over 6-months, then rising to a 3% annual rate over three-months. The core rate for the monetary union rose 2.9% over 12-months at a 2.7% annual rate over six-months, it steps up to a 2.8% annual rate over three-months. Headline inflation is resisting moving down to the 2% level consistently while core inflation appears to be stuck just short of 3%. Whether these trends are good enough depends on whether the ECB sees itself implementing precision-guided policy or playing horseshoes and hand grenades.

EMU Inflation Holds the line 2% Beckons

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Total housing starts increased 5.7% (-0.6% y/y) during April to 1.360 million units (SAAR) after falling 16.8% in March to 1.287 million units, revised from 1.321 million. Starts in February rose a little-revised 12.4% to 1.546 million units. Starts remained 24.6% below the most recent peak of 1.803 million in April 2022. The Action Economics Forecast Survey expected 1.420 million starts in April.

Housing starts by type were mixed last month. Starts of single-family units eased 0.4% (+17.7% y/y) to 1.031 million after declining 8.7% in March to 1.035 million, revised from 1.022 million. They reached a high of 1.286 units in December 2020. Multi-family starts increased 30.6% (-33.1% y/y) in April to 329,000 after falling 38.8% to 252,000 in March, revised from 299,000. They reached a high of 624,000 units in November 2022.

Regional activity was mixed in April. In the Northeast, the level of starts fell 22.6% (-43.8% y/y) to 72,000 units after declining 21.8% in March and 10.5% in February. Starts in the Midwest rose 19.1% (3.4% y/y) to 181,000 following a 36.4% March decline. Starts in the South improved 10.1% (4.9% y/y) to 799,000 after a 15.9% March decline. In the West, starts fell 2.5% (+1.7% y/y) to 308,000 after declining in each of the prior three months.

Building permits declined 3.0% (-2.0% y/y) in April 1.440 million units after falling 5.0% to 1.485 million in March, revised from 1.458 million. It was the lowest level of permits since December 2022. Single-family permits eased 0.8% (+11.4% y/y) to 976,000 in April following a 4.2% March decline and a 0.4% February slip. Multi-family permits weakened 7.4% (-21.9% y/y) to 464,000, after falling 6.5% in March.

The housing starts and permits figures can be found in Haver's **USECON** database. The expectations figure is contained in the **AS1REPNA** database.



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- Single-family starts decline but multi-family surge.
- Starts are mixed throughout the country.
- Building permits fall to lowest level in over one year.


Confidence in the Euro Zone: Lower in Germany and Belgium But a Surprise Rise in Italian Consumer Confidence

Summary

Louise Curley

More Economy in Brief

Economic Letter From Asia: Know the (FDI) flows

U.S. Leading Economic Indicators Fall Sharply in April

EMU Inflation Holds the line 2% Beckons

U.S. Housing Starts Rise Modestly in April; Building Permits Fall

Euro-Zone countries:	Apr 05	Mar 05	Apr 04	M/M % or Dif	Y/Y % or Dif	2004	2003	2002
IFO Index (2000=100) Germany
Business Climate	93.3	94.0	96.4	-0.74	-3.22	95.7	91.7	89.4
Business Conditions	93.1	93.3	95.0	-0.21	-2.00	94.0	88.4	85.3
Business Expectations	93.6	94.6	97.8	-1.06	-4.29	97.4	95.1	93.8
BNB % Balance Belgium
Business Confidence	-11.6	-8.0	-0.6	-3.6	-12.2	2.3	12.9	7.9
Consumer Confidence	-5	-2	-4	-3	-1	-4	-11	-2
ISEA (1980=100) Italy
Consumer Confidence	104.8	104.2	101.7	0.58	3.05	100.4	106.8	115.8