Economy in Brief

Japan’s economy watchers index current reading moved up to 47.0 in June from 45.7 in May. This move leaves the current index below its April value and continues a string of readings below 50, indicating ongoing contraction in the current index – that string is now at four months.

The future index for the economy watchers similarly rose to 47.9 in June from 46.3 in May and it's still below its April value of 48.5. Once again there's a month-to-month improvement and the continuation of a three-month string of readings below 50, indicating expected contraction in the future by the economy watchers survey.

The current index Still, the month is striking for its degree of improvement. The current headline improved month-to-month in six of nine components. Weakening on the month is the reading for housing that slipped to 45.3 from 46.7 in May; the assessment for corporations slipped to 47.3 in June from 47.9 in May; nonmanufacturers fell to 47.6 in June from a reading of over 50, at 50.1, in May. As a result of these changes, there are no readings in June in the current index above 50, which in the lexicon of diffusion index would reflect an assessment that activity was unchanged. All the sectors and categories assessed in the current index, even though many improved in the month, are still indicating ongoing contraction.

The future index The future index shows six of nine categories improving in June as well. And the futures index shows no sector in June with a reading at or above 50, underscoring that expectations are for continuing contractions in the future. The readings that weaken month-to-month are for housing that slipped to 44.0 in June from 45.7 in May, and for nonmanufacturers that slipped to 48.0 from 48.7 - these two slips match the declines and their current index as well. However, the future index also showed a slip in employment a reading that had been running read above 50, but it slipped to 49.9 in June from 50.3 in May.

Queue standings… We can further try to understand the meaning of the economy watchers index by looking at the queue standings of the diffusion readings for June. The queue standings are presented as percentages, and they reflect the percentile standing of the June economy watcher diffusion readings relative to observations back to January 2002.

Current queue Assessed in that way, the current index has four readings that are above 50% which puts them above their medians for that historic period. The strongest reading is for eating and drinking places, followed by services. However, the headline reading is only at 44.7 percentile and the weakest component is for employment with a 20.6 percentile standing. That tells us that the employment reading has been weaker than its June diffusion value of 46.2 only about 20% of the time, marking this as a significantly weak reading. The employment reading is important. However, for both current and future readings, the household, retail, and nonmanufacturer readings (in that order) are the most important.

Future queue The future index has a slightly weaker standing with its queue reading at a 41.9 percentile position. The future index has only one reading above its median and that's for manufacturers that have a 51.0 percentile standing for June. The weakest percentile standing among the future components is for housing with a 34-percentile standing, but not far off is employment with a 34.8 percentile standing, and services with a 39.1 percentile standing. The future assessments show that a great deal of weakness is still expected according to the economy watchers that were surveyed.

In this week's newsletter, we delve into recent developments in China ahead of anticipated economic support measures from the Third Plenum meetings. The economic backdrop in China remains mixed, with cautious signals from forward-looking indicators. On monetary policy, we explore possible reasons behind unchanged policy rates this year, including the central bank’s views toward a depreciating yuan and banks' interest margins. We also look at potential reforms by the central bank, which would more closely align with practices seen in developed markets and enhance its liquidity management tools. Turning to the property sector, persistent challenges are evident despite recent government efforts to provide support. Sentiment remains subdued, reflecting sluggish sales and uncertain market conditions. We also assess the fiscal implications at the local government level, where declining revenues from land sales and high indebtedness pose significant pressures.

Growth Latest data present a mixed picture about China’s economy. In May, retail sales outperformed expectations, growing by 3.7% y/y, yet industrial production disappointed with a slowdown to 5.6% growth, as depicted in Chart 1. The deceleration in industrial output was driven by a slowdown in the manufacturing sector, with mining providing only partial offsets. Furthermore, growth in fixed asset investment unexpectedly slowed to 4% y/y ytd, largely due to a further sharp decline in real estate investment. Recent data highlight the uneven growth across China's sectors, with persistent pockets of weakness despite the government's recent efforts to implement support measures.

German industrial production fell by 2.5% in May, continuing a sawtooth pattern over the last few months. Reductions in headline output, consumer goods output, capital goods output, represent reversals from gains in April; for intermediate goods, the May decline is the second month in a row of output declines.

Trends are clear Sequential trends for German output are poor. The progression in growth rates from 12-months to six-months to three-months isn't always pointing to a steady deterioration, but the case for weakening German growth can be made comparing the three-month growth rates that are weaker to their 12-month growth rates. For the headline, for consumer goods, for capital goods, and for intermediate goods, for construction, all show that tendency. That's also true as construction, as output falls at a 26.8% annual rate over three months compared to a drop of 8% over 12 months. The pattern for manufacturing is illustrative with output down by 7.1% over 12 months, improving slightly to a loss of 5.1% annualized over six months, and then dropping at a 10% annual rate over three months. While the decline in the manufacturing pattern is not clear sequential deterioration, it certainly leans in that direction.

Real orders and sales Real orders for manufactured goods also lean the direction of weakening, with declines of about 8.5% over six months and 12 months that mushroom into a decline of 11.7% at an annual rate over three months. Real sales in manufacturing fall by 6% over 12 months, reduce that pace of drop of 3.3% over six months, and then fall at a stepped-up 8.3% annual rate over three months.

Surveys are mixed but highlight some weakness Surveys of the German economy show secular deterioration from 12-months to six-months to three-months in the ZEW current index. On the EU Commission industrial sector index, there is sequential deterioration as well. Contrarily, the IFO manufacturing index shows sequential improvement and the IFO expected manufacturing index echoes sequential improvement, rising from 86.6 over 12 months, to 88.7 over six months, to 92.7 over three months.

IP elsewhere in Europe Industrial production elsewhere in Europe shows mixed trends with France, Spain, and Portugal logging positive growth rates over three months, six months and 12 months although without any clear patterns for acceleration or deceleration. Norway shows sequential deterioration with output falling at a 1.4% pace over 12 months, at a 3.2% annual decline rate over six months, and at a 6.6% annual decline rate over three months.

Quarter-to-dates (QTD) growth Quarter-to-date growth rates (or changes in survey indexes) show mostly declines. For the traditional gauges of industrial output, output by sector in Germany, as well as for orders and real sales, the exception is an increase in the output of consumer goods in Germany. German surveys, on the other hand, tend to improve in the quarter, except for the EU Commission index. Industrial production in other European economies shows a strong gain in Spain, a gain in France, a decline in Portugal, and a sharp developing decline in Norway where output is falling at a 14.5% annual rate in the quarter-to-date.

Growth rankings are weak The queue standings that rank the annual growth rates or are applied to the levels of the variables for surveys, show all these metrics with rankings below their 50% mark putting them below their historic medians for data ranked over the last 24 years. The exception to this is output in Spain and Portugal; their output, contrarily, has very strong standings at the 98th percentile for Spain and a companion standing for Portugal at its 93rd percentile.

Results since before COVID struck We compare results in May 2024 to levels of performance in January 2020. The final column compares changes in these metrics to their levels as of January 2020 before COVID struck. All metrics show weak readings in May 2024 below January 2020 except for IFO manufacturing expectations and industrial output in Spain. All the other metrics are showing net lower readings compared to their values more than four years ago (ouch!).