Economy in Brief: 2023

Zew metrics showed a weaker economic situation in the Euro-Area this month while Germany strengthened and the US weakened, a mixed picture across these regions. Economic expectations show a stronger Germany and a weaker US performance expected.

Inflation expectations showed stronger inflation expected in Germany and the Euro-Area. Weaker inflation is expected in the US. Short term rate expectations were weaker in the Euro-Area and weaker in the US as inflation has been coming in and showing signs of behaving. Long term rate expectations fell in both Germany and in the US. Stock expectations month-to-month improved in the Euro-Area in Germany and in the US.

Economic conditions continue to show rankings well below the 50% mark for the economic situation for Germany for the Euro-Area and for the US. Economic expectations are also well below the 50% level which would mark a neutral reading. Inflation expectations, however, are uniformly low as investors expect inflation to decline from its high level and so the expectations metrics have extremely low percentile standings. Short-term rate expectations are also low because investors basically assume that central banks have pretty much got interest rates where they want them and they look for any further rate changes to be more or less window dressing. This explains why long-term interest rates have exceedingly low percentile standings. Long rate expectations for Germany are at 4.4%, in the US they are at 0.3%. There are few expectations that rates are going rise at this point. And with that expectations have shifted to the stock market where the expectations are closer to or above the 50% mark and investors are beginning to think equities again for better or for worse. Things change...

We move our attention this week to Indonesia, in light of its Q3 GDP readings released last week. The resource-rich economy is the largest in Southeast Asia and the fifth-largest in Asia by GDP, providing the bulk of the world’s nickel and palm oil supplies. Indonesia is also an important producer of other base metal and agricultural products including tin and natural rubber, and of energy commodities like coal. While slightly weaker, Indonesia’s Q3 GDP growth hovered near pre-pandemic rates, with private consumption once again the main growth driver. Delving deeper, we note continued weakness in Indonesia’s exports, which have been weighed by soft export prices despite relatively steady demand volumes. We then turn to examine Indonesia’s position as a minerals producer and its efforts – including outright export bans – to ascend the global minerals value chain. We next take stock of recent developments with the Indonesian rupiah and its relative resilience against the US dollar, noting stabilization support from the central bank. Lastly, we dive into the bank’s newly minted monetary policy tool aimed at attracting foreign inflows and discuss preliminary market responses and results.

Indonesia’s Q3 performance Indonesia experienced slightly slower GDP growth in Q3, of 4.9% y/y, registering its first sub-5% growth reading in seven quarters (chart 1). The main support for Indonesia’s Q3 GDP growth stemmed from private consumption and gross capital formation, which collectively contributed to 4.7 percentage points of growth. Also, net exports provided a slight lift to growth, while government consumption exerted a mild drag.

Italian industrial production for manufacturing rose 0.1% in September after gaining 0.3% in August. These increases came after a 1.2% drop in July and they're still part of a sequence of continuously declining industrial production calculations over the past 12 months for Italy.

Italian manufacturing production fell by 2.2% over 12 months; the pace of reduction has eased slightly to -1.5% over 6 months then it steps up to a decline at a 3.4% annual rate over 3 months. We see industrial production declining on all three timelines. The 3-month deterioration is at a faster rate than at 12-months, but over 6 months, there's an interruption in that deteriorating trend that makes the overall trend ambiguous.

Consumer goods- Consumer goods production fell by 2.2% in September after rising 1.3% in August and falling 1.6% in July. The annual rate decline in consumer goods output is 6.8% over 12 months; that's reduced to a 4.7% declining pace over 6 months but then blows out to a decline of 9.5% at an annual rate over 3 months. This pattern echoes the overall pattern from manufacturing output on the same timeline.

Capital goods- Capital goods output rose by 1.5% in September after output declined in August and July. Capital goods output shows a clear decelerating sequential trend, however. After rising 2.6% over 12 months, it reduces that to a 1.2% pace of increase over 6 months and then output declines at a 2% annual rate over three months.

Intermediate goods- Intermediate goods output rises by 0.8% in September after falling 0.7% in August and falling 0.4% in July. Intermediate goods are the only category that shows that declines in output are occurring at a diminishing pace as output falls 2.8% over 12 months; that's reduced to a -1.4% rate over 6 months and reduced slightly further to a -1.2% annual rate over three months.

Overall manufacturing goods production clearly is declining although the sequential patterns are not firmly established.

Transportation- Trends for transportation equipment show deterioration although there's a strong gain of 6.1% in September compared to August. Output rises at an 11.7% annual rate over 12 months, and at a 5.9% annual rate over 6 months, but then falls sharply at an 8.6% annual rate over 3 months.

Industrial measures Various industrial measures are presented at the bottom of the table including the EU industrial confidence measure, the Istat current orders and Istat outlook for production. In the most recent 3 months, there are nine of these observations and of these nine observations only one is positive and another is zero; the rest are negative, showing widespread weakness across these industrial metrics.

The industrial metrics show persistent negative readings over 3 months, 6 months, and 12 months. But that generally is not a pattern of worsening deterioration. The industrial confidence measure and the Istat current orders measures both show readings that are less weak over 3 months than over 12 months although the Istat outlook for production metric is weaker over 3 months and over 12 months.

Rankings Turning to the final column of the table, the rank standings show all these metrics are below their historic medians (that means below a ranking of 50%) except for capital goods output. Manufacturing industrial production has a 28-percentile standing, consumer goods output has an extremely weak 6-percentile standing, intermediate goods have a 31.6 percentile standing, while capital goods have a 60.7 percentile standing, above its historic median. For transportation output, there's also a reading that's above its 50-percentile at 69.5. However, the industrial measures at the bottom of the table have very weak standings for the most part with the EU industrial confidence measure having a standing just under its 20-percentile. The Istat outlook for production reading is at its 14.1 percentile and the Istat current orders reading is at its 37.3 percentile.