Economy in Brief: September 2024

U.K. industrial production contributed to a negative monthly GDP surprise today as IP and construction were weak in July offset in the GDP framework by services whose growth kept GDP from falling in the month.

U.K. manufacturing IP fell by 1% in July after rising by 1.1% in June and by 0.4% in May. Sequentially this means U.K. IP is accelerating since its year-on-year change is -1.3%, over six months it is fairly, and over three months the annual rate of change is +2%. That’s not exactly rollicking growth, but it does count as accelerating even if IP is falling in July. However, short of some sharp reversal, the current pattern of output does not bode well for the whole of Q3 (see Q3 to Date).

In July, U.K. industrial production fell by 1.6% for consumer durable goods output, fell by 1.8% for capital goods output, and fell by 0.7% for intermediate goods. The output of consumer nondurable goods advanced by 0.3%.

Manufacturing sector sequential growth rates from 12-months to 6-months, to 3-months, show consumer durable goods output is imploding, declining at an accelerating rate over this horizon. Consumer nondurable goods and intermediate goods both are showing acceleration from12-months, to 6-months, to 3-months. Capiral goods are in no-man’s-land. Output is weak, falling in each period, but it is not a drop that steadily accelerates although, annualized, the decline over three months is faster that the annual decline over 12 months.

In contrast, industry details are far from uniform and often extremely different. Textile & leather output, motor vehicle & trailer output, and mining & quarrying all show a strong tendency to decline over most horizons. Food, beverages & tobacco, and utilities are the two sectors that are exceptions to the weakness, and both show persisting increases with the food group demonstrating output acceleration.

The quarter-to-date calculation (QTD) logs a decline for the headline (MFG output) in July, one month into the new quarter. However, consumer nondurables and materials provide some positive momentum in the unfolding quarter. Industries show increases QTD for the food group and for mining & quarrying, as utilities take a pass on expansion for both July and the QTD as well.

Riding a very weak trend U.K. net output results since COVID struck show manufacturing output net lower – over a period of four and one-half years for all of manufacturing, and all sectors except consumer nondurables. They are up by 13% over this period. That means consumer nondurables have had a steady run, expanding on average by 2.7% year-by-year. Consumer durables output has been flat, intermediate goods output has declined on average a bit faster than nondurables output has expanded. Capital goods output has declined by nearly a half percentage point per year. Overall manufacturing output has been contracting at a pace of nearly 1% per year over the last four- and one-half years.

Meanwhile sector results are widely different. The food group, textiles & leather, and the motor vehicle group have increased output over the period at a double-digit pace ranging from a full period gain of 25% for the textile group to 12.2% for the motor vehicle group. Output in the textile group has averaged over 5% per year, with the motor vehicle group averaging a compounded pace of 2.5%. Meanwhile both the mining group and utilities fell for a net drop of 41%, a compounded drop of over 10% per year.

These are shocking disparities across industries.

The unexpected weakness in early Q3 U.K. GDP could convince the Bank of England that an earlier-than-expected follow-up rate cut is warranted as U.K. inflation is running at 2.2% year-on-year against a core increase at a more stubborn 3.3%. But if the economy is really weakening, looking for more price weakness head would make sense. The next BOE meeting will tell us what the BOE fears most.

Inflation of the European Monetary Union in August rose by 0.2% compared with 0.3% gain in July and a 0.2% rise in June. The three-month inflation rate at 2.5%, however, is part of a slow progression higher that compares to a 2.2% annual rate over six months and a 2.1% annual rate over 12 months, a moderate but clear accelerating pattern.

Country level trends The four largest countries in the monetary union also are exhibiting patterns that suggest or that outright demonstrate, inflation acceleration at least based on headline measures. Germany is the largest monetary union economy and is a slight exception with a 2.2% inflation rate over three months, down from 2.5% over six months but up from 2.1% over 12 months. France demonstrates inflation rising from 2.2% over 12 months to a pace of 2.4% over six months to a strong 3.6% over three months. In Italy, inflation transitions from a low 1.3% over 12 months to a 3% pace over six months, to another strong pace of 3.7% over three months. Spain is the true exception with inflation well behaved across most of the cohorts at 2.3% over 12 months, an elevated pace but not by much, especially when compared to a 0.7% pace over six months that only ticks up to a 0.8% annual rate over three months.

Monthly results by country The inflation process among these four large countries is still somewhat mercurial as August showed declines in inflation in Germany and Italy on a month-to-month basis while Spain's inflation was flat. On the face of it, this is good news; however, July brought an increase in prices of 0.8% month-to-month in Italy, 0.5% in Germany, 0.4% in France with a moderate 0.2% gain in Spain. So whatever the three-month pace is, it's the product of some fairly erratic monthly numbers and therefore not yet something that we can consider to be very reliable.

Core inflation Core inflation is a different story. Here we get core or at least an ex-energy reading from Germany, Italy, and Spain. The August readings are contained with German ex-energy inflation up by 0.2%, Italian core inflation up by 0.1% and Spain’s core inflation up by 0.3%. These are decelerations from stronger gains in July across the board. And two of these three countries also had larger increases in June than they had in August. Looking at the progression of core inflation for Germany, the 12-month ex-energy rate is 2.5%, the six-month pace is 2.6%, and the three-month pace is 2.4%; all pretty steady stuff. Italy shows core inflation at 2.4% over six months and 12 months that moves up to 3.1% over three months. Spain shows core inflation at 2.7% over 12 months, up to 2.8% over six months and up to 4.3% over three months.

The performance of Brent oil prices explains the headline/core difference as oil prices fell over these progressively longer periods; over shorter periods oil prices have fallen faster tending to push headline inflation down faster over these short horizons contributing to the illusion of inflation deceleration. Even so, deceleration is not a pattern that is detectable in headline inflation for these countries.

The bottoms line here is that core inflation is still stuck and too high and that is too much evidence of inflation accelerating even in the face of easing oil prices for monetary policy to seek further accommodation.

The economy watchers index for August stepped up to a reading of 49.0 from 47.5 in July. The reading for the future index moved up to 50.3 in August from 48.3 in July. Diffusion indexes are constructed so that readings above 50 indicate a net expansion while readings below 50 indicating a contraction. The improvement of the current index in August, while a significant step up, still leaves that reading short of the neutral reading of ‘50’ and therefore, despite the improvement in the diffusion reading value, it continues to indicate contraction in August. Formally the diffusion index indicates a lesser pace of contraction in Japan’s economy. However, the future index signals expansion expected for the six months ahead.

The diffusion of diffusion is at the bottom of the table; that measure indicates the breadth of the change in the monthly diffusion values either month-to-month or over some of the broader periods depicted in the right-hand portion of the table. Over the last three months, for example, the headline and its nine components show improvement in 70% to 80% of those readings for current index readings. The future index shows improvement in all categories in August compared to improvement in 70% of them in July and in June.

Looking at the broader periods over 12 months, six months, and three months… both the current and the future indexes are higher across-the-board compared to a year earlier. But over six months, weakness is broadening as the future index is lower across all categories compared to its diffusion readings over 12 months- and the current index is nearly as broadly weak. Over three months there is recovery in train for the current as well as for the future index with the monthly reading higher across 50% to 60% of the categories-comparing three-month to six-month values. That means either small improvement in more than half the categories is in train, or a mixed picture of balanced ups and downs persists.

Apart from assessing monthly patterns and patterns of growth for a year-in, we can assess the level of the diffusion index compared to their historic distributions of results. The queue standing does that. The current reading as a 60.1 percentile standing while the future index has a 64.8 percentile standing. Both are above their respective medians (medians occur at a 50% ranking). Unfortunately, jobs have a below-median ranking in the both the current and the future frameworks. Current employment has a 28.9 percentile standing – quite weak. However, the distribution is packed tight in the present range of values. The current situation’s 49.7 diffusion reading compares to a full period average reading of 50.3 and a higher median of 53.1. The ranking is comparable to median value but clearly the August value is still quite close to its historic mean. The future index diffusion value, despite its 41.1 percentile standing, is above its historic mean but below its historic median of 52.4.

On balance, the employment readings are getting stronger. The current index has been moving up longer that the future index. Both the headlines are moving higher. But there is some way to go to put both the indexes at a solid level compared to where they have stood historically, based on rankings. The 60th percentile range readings are above their respective medians but are not particularly strong reading levels.

In this week's newsletter, we explore Asia’s manufacturing activity, with a particular emphasis on the semiconductor sector. While that sector continues to expand overall, some economies are experiencing a slowdown in growth (Chart 1). We also assess the growing role of electronics in Asian exports, highlighting Taiwan's significant increase in electronics export share and South Korea's ongoing recovery in this area (Chart 2). Focusing further on the electronics sector, we note an interim stall in global semiconductor sales growth, although it remains robust with double-digit increases (Chart 3). We then delve into specific Asian economies, starting with Taiwan. Here, we identify dual drivers of industrial production: consumer electronics and electronic parts, including semiconductors (Chart 4). Next, we examine Malaysia, which has developed a strong semiconductor ecosystem with expertise in back-end processes and is more recently making headway in front-end areas like chip design (Chart 5). Finally, we consider India’s emerging semiconductor sector, which, despite being in its early stages, is poised for growth thanks to recent initiatives aimed at bolstering domestic prowess (Chart 6).

Asia’s manufacturing complex The manufacturing sector across much of Asia continues to expand, although recent months have seen a deceleration in the rate of growth for some economies. As illustrated in Chart 1, Taiwan's manufacturing PMI peaked at 53.2 in June 2024 but subsequently moderated to 51.5 in August, reflecting a significant slowdown in growth for output and new orders. A similar trend is evident in Southeast Asia (ASEAN), where the PMI has recently edged closer to the neutral level of 50. Within ASEAN, Indonesia has been a notable drag, with its PMI slipping into contractionary territory in July, while Vietnam's PMI has remained above the regional average. In contrast, South Korea's manufacturing sector has shown robust momentum, with output growth reaching a 40-month high in August, thereby supporting the overall manufacturing PMI for the country.