Economy in Brief

In this week's newsletter, we explore shifts in trade patterns across Southeast Asia. Our analysis reveals considerable changes in the region's export landscape, both in terms of destination markets and product composition. Economies like Vietnam and Thailand are now proportionally increasing their exports to the US, whereas Indonesia has seen a marked rise in shipments to China. Further investigation into ASEAN-6 exports highlights a growing dominance of electronic and electrical products, barring Indonesia. This trend reflects both the current upswing in the electronics cycle and deliberate strategies by regional economies to capitalize on heightened global demand, including for semiconductors.

We also delve deeper into Vietnam, where gains stem from global supply chain shifts and deepening economic integration with China, its geographical neighbour. Our focus then shifts to Indonesia, emphasizing its unique reliance on commodity exports within the ASEAN-6, particularly in its trade relations with China. Lastly, we examine labour and productivity dynamics within the ASEAN-6. We discuss potential challenges arising from rising labour costs, which could impact regional competitiveness. Conversely, we also highlight substantial productivity advances in Vietnam, which contrast with slower progress seen in peers such as Thailand.

Trade shifts by export destination and product The global trade landscape continues to evolve, even in Southeast Asia. Chart 1 illustrates how the trade destination mix among Southeast Asian economies has undergone significant changes compared to the pre-pandemic era. For one, economies such as Thailand and Vietnam have experienced a substantial increase in their share of exports to the US since late 2019. Equally noteworthy, Indonesia has seen a surge in its exports to China during this period. Interestingly, Vietnam and Singapore have also shown an uptick in their share of exports to China, albeit to a lesser degree. These trends challenge, at least for ASEAN-6 economies, narratives of trade diversification away from China. Moreover, the importance of exports to the EU and Japan has declined for the region in recent years.

European IP trends are muted in May as the headline fell by a sharp 0.6% month-to-month after coming up flat in April. Manufacturing output fell by 0.8% month-to-month. Output in May fell in consumer durable industries, for intermediate goods and for capital goods. In seven of thirteen EMU members presented in the table output also fell in May. Month-to-month changes in output, while admittedly are quite volatile, show flip-flopping as 46.2% of table reporters demonstrate accelerating output in May compared to 53.8% in April and 30.8% in March.

EMU output is in the process of a ‘soft acceleration.’ I term it as such because growth rates get progressively larger from 12-months, to 6-months, to 3-months. But all these growth rates are negative. So, the declines are becoming less pronounced. Manufacturing displays the exact same general characteristics.

Sector growth rates sequentially show consumer goods output growing on all horizons and engaged in a steady sequential acceleration. Consumer durables are closer to showing a declining trend on all negative sequential rates of growth. Nondurable consumer output is close to a pure sequential acceleration on very strong growth over three months and positive growth over all three sequential periods. Intermediate goods have no clear trend, but output does decline on all horizons. Capital goods output is also trendless but logs a rise over three months after significant declines logged over six months and 12 months.

The EMU median shows three negative numbers across the 13-reporting members. With acceleration across these members fading from 58.3% over 12 months and 66.7% over six months to 33.3% over three months.

Quarter-to-date (QTD) growth shows a gain for the EMU over all as headline IP is up at a 0.2% pace and manufacturing is up at a 0.7% annual rate. However, across 13 members in the table, eight report QTD declines in manufacturing sector output. However, there are three showing growth QTD that is very strong growth, of 20% or more, and another showing growth of nearly 17% (Belgium).

Output in EMU countries flounder through May. The trends are mild or muted even where they are somewhat positive.

EMU inflation ticked up by 0.1% in June after also rising by 0.1% in May – good stuff! The large countries show May changes ranging from 0.3% to -0.1%. May saw inflation rising in a range of 0% to 0.2% for the Big Four economies. That’s a nice, tight, low range.

Sequential inflation shows headline inflation running at 2.5% over 12 months and at 2.8% over six months, that decelerates to 1.7% over three months, more good news. But across the large economies in the EMU, inflation generally accelerates over three months to a 5.4% pace in Germany, 3.5% in France, and 3.0% in Italy. Only Spain shows a slower 1.7% pace. However, the year-on-year rates are more target-friendly. There, Spain has a high gain at 3.6%, Germany and France have 12-month rates that cluster around 2.5%, and Italy has a gain of 1%.

However, when we look at the core – excluding food & energy or just ex-energy - the results are much less target-friendly. Year-over-year France and Italy are close to target, with France at 1.9% and a 2.1% pace in Italy. German inflation is up at a 2.6% pace ex-energy while the core in Spain has inflation up by 3%. However, the tables are turned over three months where Germany and Spain show inflation as moderate at a 2.1% pace and France and Italy have core inflation up at a 2.6% to 2.8% pace. Still, these numbers are getting closer to the ‘two-percentish’ target the ECB current has.