Economy in Brief: April 2024

Just the facts ma’am- Inflation has overshot the European Central Bank's target (of 2%) for 33 months in a row. Now, with the unemployment rate in the Monetary Union at 6.5%, the lowest level it's seen since the Monetary Union was formed, the ECB is preparing to cut rates. REALLY!!

Curiouser and curiouser- I cannot stress enough what a curious situation this is, especially because the ECB, unlike the Federal Reserve, has a mandate that focuses only on inflation and has no reference to growth or to full employment or the unemployment rate.

Alice in blunderland? It's as though central bankers have stepped through the looking glass and found themselves in a world quite different from the one, they used to inhabit. Once, their principal responsibility was price stability. Suddenly, they seem far more infatuated with preserving low rates of unemployment that in the past proved to be (1) elusive, (2) sustainable, and (3) even dangerous, to pursue. “I was so much older then, I’m younger than that now?” (Dylan excerpt)

A new low in unemployment or policy judgement? The unemployment rate in the monetary union has been at 6.5% in 11 of the last 12 months. This is the lowest unemployment rate the monetary union has experienced in its existence. In October 2023, there was a hiccup in which the unemployment rate moved up to 6.6% for one month and then it moved back down to 6.5% - hence 11 out of 12 months at 6.5%- hic!

A festive labor market for all…almost all The table produces statistics for 12 of the oldest EMU members. It shows unemployment rate data ranked from 1994 to date. The unemployment rates for these twelve members are below their medians for every single member except for tiny Luxembourg whose unemployment rate stands at its 78.8 percentile and has been higher only about 21% of the time. By contrast, the monetary union has never seen an unemployment rate lower than this. Belgium has seen an unemployment rate lower than its current 5.5% only 7.6% of the time. Ireland has seen its unemployment rate lower than its 4.2% only 5.5% of the time. France has seen its unemployment rate lower than its 7.4% only 8.1% of the time… and so on. Unemployment rates across the monetary union, where they are not low in absolute values, they are low relative to each country's historic experience. For example, Greece has an 11% unemployment rate; it has been lower than that only 28.5% of the time. Spain's unemployment rate at 11.5% has been lower than that only about 24.4% of the time.

Headline inflation is showing signs of behaving in the European Monetary Union (EMU). In March, German inflation saw the monthly change in headline HICP fall by 0.3%, in France it fell by 0.4%, in Spain it fell by 0.4%, while in Italy it rose by 0.1%. The year-over-year increases in the HICP headline inflation rate show a 3% increase in Spain, a 2.4% increase in France, a 2.1% increase in Germany, and a 1.3% increase in Italy. Italy wins the kewpie-doll for attaining its 2% goal first! The target for inflation in the EMU is at 2%; it’s for the whole union. The large economies in the EMU are only starting to bring their respective year-over-year inflation headlines in line with the ECB target. However, the year-over-year inflation rate in the monetary union has been excessive for the last 29-months. That's a lot of overshooting.

In this week's letter, we explore recent developments in India, China, and advanced Asian economies. We observe ongoing disparities across Asian economies in their recent growth figures, but we also note a big uptick in their latest inflation readings. Economically, India remains on a solid footing heading into its general elections, while China is showing signs of stabilization following its latest official PMI prints. The divergence extends to advanced Asia’s industrial complex, with February readings indicating continued growth in South Korean production, while Taiwan’s and Japan’s contract for idiosyncratic reasons. Nonetheless, South Korea and Taiwan continue to experience an increased share in semiconductor-related goods production, reaping continued benefits from the upswing in chip demand.

Setting aside these divergences, we also examine recent financial market developments, with a specific focus on India. We note the interim rebound in small and mid-cap equities following recent steep selloffs. Additionally, we look into the Indian rupee, which has appreciated slightly against several currencies but weakened considerably against the US dollar.

Developments in India Elections are increasingly at the forefront of attention for India watchers, as the country gears up to head to the polls from April 19. The elections will be the largest in the world, involving about 960 million voters and spanning seven phases over 44 days. India’s current Prime Minister Modi seeks to secure a third term, with his political coalition poised to compete against one led by the Indian National Congress. Heading towards the polls, the Indian economy has benefited from a robust foundation and strong growth. India’s real GDP growth accelerated to 8.4% y/y in fiscal Q3 (October-December), far outpacing growth seen in several other emerging Asian economies. Nearly half of India’s growth over the period was driven by capital formation (Chart 1), which logged double-digit growth in fiscal Q2 and Q3. India’s rapid expansion in capital investment can be partly traced to the government’s push for more infrastructure and manufacturing investment.