Economy in Brief: January 2023

Japan's surveys continue to show a struggle for growth. The Economy Watchers Index for November weakened to 48.1 from 49.9 in October; it has risen from its August low. However, the last four months show readings below 50 which indicate contraction. Similarly, the Teikoku indexes show all sectors with diffusion readings below 50 although sectors evidence a minor bounce in November compared to October. The METI index for industry shows a modest drop in November to 95.2 from 95.3 in October and that is part of an ongoing trend of weakness. The LEI for Japan fell to 97.6 in November from 98.6 in October and is on a declining trend.

Economy Watchers Current: These metrics uniformly show Japan with already weak again our performance is sliding into a period where growth appears to be weaker. The Economy Watchers Index fell in the month as the retail sector dropped to 46.6 in November from 48.8 in October. The eating & drinking sector, which had shown some promise in October as it rose to 61, plunged back to 47.9 in November, its lowest reading since August. The services sector is an exception with a diffusion reading of 52.6, above its breakeven reading but below the 56.8 reading in October; it indicates only bare-bones growth in the sector. As of November, the Future Index fell to 45.1 from October’s 46.4 and it is also on a weakening trend – it points to contraction ahead.

Economy Watchers Assessments: Assessing the level standings in the Economy Watchers index, standings of the headline and its components generally are above their 50th percentile, a level indicating they are above their historic medians (employment is the exception). Index level rankings show a great deal of variation with the services sector reading at a 90.7 percentile standing versus a low at its 26.7 percentile for employment. The Future Index is below its 50th percentile. However, ranked on year-over-year growth, the readings are all below their medians and below their respective 20th percentiles indicating weakness in momentum.

Teikoku Indexes: The Teikoku indices all are below 50 and have been that way for a series of months. However, evaluated against their index levels since August 2009 all the indices are at or above the 50th percentile indicating they are at or above their median values for that period. Still those rankings range from a 50th percentile reading for the construction sector to a high rating of only 64.5% in the wholesale sector. Alternatively ranked against their year-over-year growth rates only one sector, retailing, has a ranking above its 50th percentile; all the rest show growth rates that are below the median growth rates they had previously experienced. Manufacturing has the weakest growth ranking of all at its 31st percentile but that's not much better than construction at its 32.9 percentile, or wholesaling at its 39th percentile.

METI Industry Reading: The METI industry index increased month-to-month and has a ranking of its index level that is only in its 12.8 percentile back to 2009 - an extremely weak ranking for an index level that grows over time. The METI survey creates indexes of activity and is not a diffusion index, like the surveys above. The one-year growth ranking for the industry index is in its 33rd percentile, also below its median, indicating below normal and unsatisfactory growth in Japan's industrial sector.

The Leading Economic Index: Japan's LEI index while fall month-to-month has a level ranking only at its 30.8 percentile, well below its historic median with a growth ranking at its 28th percentile similarly below its historic medium for growth. The LEI index, like the METI industry index, is not a diffusion reading and should growth over time with the economy- a weak level index is a very poor reading.

The Situational Wrap-up These surveys paint a picture for the Japanese authorities that's quite challenging. The current assessments of the state of the economy indicated by the index level ranks are for the most part moderate or weak with few indications of strength. However, the growth rankings are unequivocally weak and pointing to deteriorating prospects. The Economy Watchers Futures Index is particularly weak and disturbing from the standpoint of the growth that it points to, and it agrees with the weakness from Japan's leading economic index that has only a 28th percentile standing.

Policy and Global Conditions The Bank of Japan has been fighting against the moderate inflation and it's in a much different position than other G7 central banks who, as a rule, seem to have much more work to do. But Japan is renowned internationally for its massive government debt levels; fiscal policy is not a tool that Japan can use. Meanwhile, deteriorating conditions and rising interest rates around the world are going to make the international situation more challenging for Japan, but with one key exception. Japan's most important trading partner is China and China has recently broken away from its zero Covid policies greatly enhancing its prospects for growth. Having better growth in China is more important to Japan than having better growth in Europe. Still, apart from this reintroduction of China, whose prospects for growth are still a little difficult to handicap, the prospects for global growth are getting worse as the World Bank has just cut a series of forecasts on global growth for the year ahead. The reduction slashes its former outlook for 3% growth to only 1.7% for 2023. Despite China lifting its zero Covid rules, the World Bank cut its outlook for growth in China, too, from 5.2% to 4.3%. Japan's current performance, its current assessment, and its prospects for future growth, put Japan in a very difficult position in this challenging global environment.

Output in the European Monetary Union shows the median rise across early reporting members of 1.3% in November. This is a rebound from a 1.2% decline among the same members in October and compares with a 0.5% increase in September.

Progressive growth trends The medians for their manufacturing growth rates are mixed with year-over-year IP output rising by 0.4%, the six-month median shows a gain of 1.8%, while the three-month median shows a fall of 1.2%, annualized. The progression does not point to any clear trend, although the disturbing element is the decline over the recent three months with five European Monetary Union (EMU) members showing industrial production declines over three months at annual rates ranging from minus 1.2% to minus 11.4%. Over six months only three EMU members show manufacturing output declines, the same as over 12 months.

Quarter-to-date developments Quarter-to-date tracking of industrial production trends in manufacturing are up to date through November; that's two out of three months of the fourth quarter. The median annualized change for the quarter at this juncture is a decline at a 1.5% annual rate. Greece, the Netherlands, and Finland show the largest quarter-to-date declines in progress while the strongest gains come from Belgium, Ireland, and Austria. There is quite a division in growth rates among these early reporting members for fourth-quarter growth, ranging from +20% to -13%.

Recovery since Covid There are still three European Monetary Union members, Germany, France, and Portugal that have not returned to the level of manufacturing output they had enjoyed as of January 2020 before Covid struck. The median among early reporting members shows the gain from January 2020 is 8.3%. The strongest gains from January 2020 comes from Ireland, Belgium, and Austria. These contrast with the countries that have not yet reestablished January levels for output.

Nordic growth Sweden and Norway, countries that are not European Monetary Union members, also have reported manufacturing production data early. Both show output declines in November but both show increases in the recent three months. Sweden shows a 0.4% gain over 12 months, a 1.4% annual rate decline over six months and a strong 5.3% pace over three months. Norway shows positive growth rates on each timeline with growth of 0.3% over 12 months, rising to 2.6% at an annual rate over six months, and ticking down to a 2% pace over three months.

Europe a mixed picture On balance, Europe does not show us strong trends for manufacturing industrial production. There is a solid gain in November but that follows an equally weak performance in October. However, among the nine early reporting countries, four of them Austria, Belgium, Germany, and Ireland show gains in output on all horizons over 12 months, six months and three months. Among those four, Belgium and Germany show trends that are steadily accelerating. On the negative side, only Finland and Greece show declines in output on all three horizons although both of those countries also show steady deceleration is in progress in each of them.

Still in the grip of cross-currents Europe is still in the grip of various cross currents as they are still in the aftermath of the adjustment to Brexit, still adjusting to life in the wake of Covid with the Covid virus still circulating, it has a full scale war going on just outside of its border between Russia and Ukraine, and the European Central Bank is in the midst of trying to get a grip on the inflation that emerged in the post Covid period. This is a lot to deal with at once and it's not surprising that European economies are having some struggle with it. The PMI data across Europe shows that there is a broad slowing of progress that really cuts across manufacturing and services industries. With inflation still excessive, and the European Central Bank raising rates, the prognosis for growth in 2023 is guarded.