Economy in Brief

The end of summer is turning out to be a difficult time for France even though industrial output is in a seemingly solid trend. Output in June rose by 3.5%, it did that after a weak May when output fell by 1.1% and now in July output is falling by 1.6%. By itself, the manufacturing trend is simply not that worrisome, but it is built upon somewhat more convoluted trends with July’s drop. Add this complication to a political environment that is quite difficult as in real time, in September, France's government is being dissolved, the Prime Minister is being dismissed, and President Macron is under pressure. There is a decidedly split and fractured legislature to deal with as he is going to have to appoint yet another prime minister, the second lost government in less than a year. Macron continues to resist calling elections or stepping down himself.

France has been called out by the markets for the size of its government sector and its debt as Macron’s earlier tax cuts produced fiscal deficits not growth. French deficits continue to push up bond yields toward levels being paid by Italy. The U.K. is also under pressure for its substantial indebtedness and its inability to get control of its economy and generate growth. None of these are new trends and certainly not foreign to anyone in the United States where large fiscal deficits, concerns about future fiscal deficits, and President Trump's own concern about deficits as exhibited by his attempt to try to push interest rates down to reduce the interest cost of the debt. This has pushed the fiscal budgeting process into the mainstream of making monetary policy creating a clash over central bank independence in the United States- with reverberations abroad.

The best way to keep debt or the size of the government sector from becoming a problem is to control it and none of these governments seem to have been able to do that. A country that is going to rely on debt and increasing indebtedness is pushing the day of reckoning out on the future generations. That becomes increasingly unpalatable as population growth has been slowing. Slowing population growth and rising debt levels are an extremely bad combination and yet we see these as real international trends.

In France, the one-year trend for industrial production in manufacturing is still relatively solid at 1.5% growth over 12 months, stepping up to 4.5% at an annual rate over six months and up to 8.2% annualized over three months. On the face of these figures, if they hold up, the progression for growth is pretty good. However, when we see what produces these results in the table, which is a sharp drop in May and July, with a sharper increase sandwiched in between, we are left wondering whether the sequential trend is going to hold up at all. Consumer durable goods output trends are one of the reasons that that output trend in manufacturing is so strong with positive growth in May, June and July; the sector logs 12-month growth of 3.7%, 6-month growth at 9.2% at an annualized rate, and 3-month growth at a stunning 17% annual rate. That would seem to be a lot of strength to carry the day, but consumer nondurables output trends point in the opposite direction with -0.6% over 12 months, a -1.2% annual rate decline over six months and then -5.7% at an annual rate over three months. The capital goods sector sides with growth with a 4% rate over 12 months and an 8.5% pace over six months and that largely holds up at 8.1% over three months. However, the sequential growth rate for intermediate goods shows a drop in output of 0.8% over 12 months, a nice rebound with a 3.9% annual rate over six months and then the declining pace of 1% annualized over three months – a bit less coherence.

Transportation output in France is considerably stronger than the trends in motor vehicle registrations. Even though output in the auto sector continues to be quite firm to strong, registrations are weakening. That can’t be good.

This week, we review the state of play in Southeast Asia and Australia. In Thailand, political uncertainty lingers after the removal of former Prime Minister Paetongtarn, with investors now eyeing fresh elections in the coming months. The ongoing political flux has only deepened concerns over Thailand’s persistent economic underperformance relative to regional peers (chart 1). Indonesia, too, has faced recent political turmoil, as protests over lawmakers’ housing allowances turned violent. While tensions have since eased and financial markets partially recovered (chart 2), the episode highlighted the fragility of investor confidence.

Elsewhere in Southeast Asia, some economies are pressing ahead. Malaysia has made significant strides in establishing itself as a global tech hub, supported by robust direct investment flows (chart 3). Vietnam, likewise, continues to position itself as a manufacturing and electronics powerhouse. Its strong export performance has driven growth but also drawn scrutiny, particularly as the US trade deficit with Vietnam has widened alongside rising imports (chart 4).

In the Pacific, Australia has shown encouraging signs, with Q2 GDP growth outperforming expectations on the back of stronger household consumption (chart 5). This has bolstered expectations that the RBA will pause rate cuts at its month-end meeting. Even so, close attention remains on the labour market (chart 6), potential headwinds from US tariffs, and a broader productivity challenge.

Thailand Thailand continues to struggle to regain its footing, weighed down by ongoing political turmoil. Former Prime Minister Paetongtarn was removed from office by the Constitutional Court in late August, following her July 1st suspension over a leaked phone call with former Cambodian leader Hun Sen. In her place, lawmakers elected former Deputy Prime Minister Anutin as the new premier. However, as part of the deal that secured his appointment, Anutin has pledged to dissolve parliament within four months and call a general election. This political upheaval compounds Thailand’s broader economic challenges. Growth has persistently lagged behind its Southeast Asian peers (chart 1), with tourism—a key revenue source—stalled and still short of pre-pandemic levels. At a time when deeper reforms are needed to unlock the country’s full potential, Thailand instead faces prolonged political flux, leaving policy clarity and direction uncertain even as neighbours forge ahead.

Germany's factory orders declined for the third straight month in July. Real new orders fell 2.9% month-on-month in July, against expectations for a small increase. The drop was sharper than a 0.2% decrease in June; foreign orders declined 3.1% in July, as orders from the euro area contracted 3.8%, and orders from outside the euro area fell by 2.8%. These metrics suggest that demand both inside and outside the euro area remains weak. Domestic orders dropped 2.5% in July, an exact offset to their gain in June. When ranked on growth rates over the last 30 years, all three sector growth rates are below their medians (below a ranking of 50%). However, when ranked on the real index number level, total orders rank at their 55.6 percentile, foreign orders rank at their 79.5 percentile and domestic orders rank at their 15.2 percentile. All-in-all it’s an unimpressive report.

Orders sequentially and QTD: Sequential trends are ambivalent but still clearly weak. Sequential growth rates do not show a clear acceleration/deceleration pattern. But for total, foreign and domestic real orders, both 3-month and 12-month growth rates are negative (one exception: foreign orders over 12 months). Domestic orders show negative growth over 6 months as well. Quarter-to-date growth rates are negative for all sectors.

Sales trends: Real sales are mixed in July, rising 0.9% overall on declines in two sectors: consumer durables and intermediate goods. Sector sales mostly maintain growth as manufacturing sales are positive based on growth rates over 12 months, 6 months, and 3 months. Consumer goods and intermediate goods sales show deceleration and ongoing contraction. Consumer durable goods and intermediate goods show QTD declines. On the manufacturing & mining to total, manufacturing and capital goods show index standings above their respective 50% on 30 years of data. That also shows above-median growth rates on annual data along with consumer goods and consumer nondurable goods.

Industrial confidence: Industrial confidence measures for Germany, France, Italy, and Spain, the four largest EMU members, show improved (but still net negative readings) in July compared to June. Over three months and six months, Germany and Italy show some improvement; France still shows steady deterioration. Spain shows improvement over 3 months and it is only slight improvement. The queue standings for the industrial reading over 30 years of data show Spain with an above-median reading in July. Germany and France are exceptionally weak and Italy has been weaker only 26% of the time based on the queue standing measure. Not only are German orders and demand weak and faltering but the broad EU Commission measures of industrial confidence show broadly weak readings for the largest economies in the EMU.