Economy in Brief: 2024

The ZEW economic situation in January 2024 improved in the euro area and in the United States as it deteriorated in Germany. Two of the three metrics retain large negative readings and all three remained very weak in their respective historic queue of data.

The euro area economic situation improved from -62.7 in December to -59.3 in January. The U.S. situation improved from +7.8 in December to a stronger +15.3 in January, while Germany slipped from -77.1 in December to marginally weaker -77.3 this month. The U.S. current situation is the best of the lot, but still below its historic median with a ranking at its 42.2 percentile, below its median which occurs at a percentile ranking of 50. The euro area has a ranking in its 25.9 percentile and Germany has a ranking in its 14-percentile.

In this week’s letter, we investigate the Australian economy, a major producer of various global commodities, including iron ore, copper, and lithium, among others. We start by looking at recent monetary policy developments in Australia, against a backdrop of still-high inflation. We next examine trends in Australia’s household sector, taking stock of slowing consumption growth and moderating debt levels. Closely tied to household debt is the property sector, which has started to see firmer prices again after a respite in early 2023. We then touch on Australia’s labour market, which remains tight but with persistent real wage losses due to high inflation. Lastly, we look at Australia’s trade, with a focus on China, a key trading partner. We note strong growth in Australia’s exports to China, aided in part by iron ore, amid slowing shipments to advanced Asian economies.

Monetary policy Australia has undergone significant monetary tightening in recent years to tackle inflation. Specifically, the Reserve Bank of Australia (RBA) has raised its policy rate by a total of 425 bps since April 2022, 125 bps of which occurred in 2023 (chart 1). Headline CPI inflation has cooled significantly since, to 4.3% y/y in November 2023, from a peak of 8.4% in December 2022, as pressures from food and housing prices cooled. With that said, consumer inflation remains far from the RBA’s target of between 2% and 3%, making RBA rate cuts unlikely, at least in the immediate months ahead.

U.K. manufacturing output rose by 0.4% in November after falling by 1.3% in October and falling by 0.4% in September. Sequentially, manufacturing output is weakening; it advances by 1.2% year-over-year, the growth rate shrinks to zero over six months and shrinks further to a -5% annual rate over three months.

Trends for output by sector are somewhat complicated with recent months not providing a very clear picture. Among the observations for consumer durables and nondurables output, intermediate goods, and capital goods, only the capital goods industry shows a decline in November. However, manufacturing and all these sectors and subsectors showed declines in October, while in September only consumer durable goods showed an increase along with a minor rise in consumer nondurable goods, intermediate goods show another relatively sharp decline and capital goods were flat.

Sequential growth rates from 12-months to six-months to three-months, as already mentioned, reveal a steady deceleration in the growth rates for manufacturing. But this is not so clearly expressed across the sectors, as consumer durables and nondurables show unclear patterns and only intermediate goods and capital goods output succumb to the pattern of sequential worsening deterioration. Consumer nondurables, in fact, show positive-growth rates on all horizons.

Upon turning to quarter-to-date calculations that compare the annualized growth rates two months into the fourth quarter with the average for the third quarter, we find negative growth in all the components in the table, except under ‘industry-detail’ there, food, beverages & tobacco show a hearty gain.

To get an idea of how tight production might be, I look at current output levels as a percent of their maximum output on data back to 2010. Manufacturing is at 90% of its past peak on this period. Consumer durables is at 94% of its peak, nondurables at nearly 97% of their peak. Not surprisingly, food, beverages & tobacco, which tend to be very trend-dominated, are essentially at their peak reading at a 99.9 percentile standing (stronger only in May 2022). The weakest standing is for mining & quarrying at a 43.7 percentile mark. And surprisingly the utility usage for gas, electricity & water has only 53.6% of its past cycle peak.

The column to the far right looks at the simple percent change in current output compared to levels on January 2020 before the pandemic struck. Output is lower for manufacturing overall by nearly 5% and is higher only for consumer durables (by 1.2%) and consumer nondurables (by 13.9%). For more detailed industries, food, beverages & tobacco are higher by 16.9%, textile & leather output is higher by a very strong 43.6%, motor vehicle & trailer output is higher by 3.2%. Mining & quarrying output is lower by 38.8%. Utility output is lower by 42.2%. This is an astonishingly strong decline as utilities service ongoing activity and growth and except for very small margins is not inventoriable.