Japanese spending, Chinese exports & German manufacturing in recovery mode

Emily Nicol
Chris Scicluna

Japan spending surges, but wages remain weak:
While Japan’s economy likely contracted at its steepest pace on record in the second quarter, like in other major countries, the easing of lockdown brought a notable improvement in spending, particularly on goods, towards the end of the quarter. Indeed, household expenditure jumped by a record 13%M/M in June, to leave it a little more than 1½% higher than the pre-pandemic level and just 1.2% lower than a year earlier. And when excluding spending on more volatile items – i.e. housing and transport – core expenditure was almost 3% higher than the pre-Covid peak, with further sizeable increases seen in spending on clothing (60.7%M/M) and household appliances (23.4%M/M) in June.

The BoJ’s consumption activity index similarly posted a big increase in June (8.6%M/M) for the first time this year, driven by a surge in the durable goods component (26.0%M/M), as well as growth in spending on non-durable goods (7.9%M/M) and services (4.9%M/M). But in contrast to the household spending figures, the consumption activity index remained considerably lower than January’s peak (-11.7%), with expenditure on services still down by almost one quarter. Furthermore, given the resurgence in coronavirus infections, we might expect the revival in spending activity to have moderated somewhat last month.

Ongoing weakness in income growth will be unfavourable for the near-term path of consumption, with wages down compared with a year earlier for the third consecutive month albeit by a smaller-than-expected 1.7%Y/Y in June. Perhaps inevitably given that containment measures remained in place, this principally reflected a further double-digit decline in overtime earnings (-24.6%Y/Y), while bonus payments were also weaker (-2.4%Y/Y). In contrast, regular earnings growth was a touch firmer in June, up 0.6%Y/Y – although when adjusting for sampling errors, MHLW estimated that regular earnings were down 0.3%Y/Y.

Chinese exports rebound, but imports slip back:
China’s export data for July beat expectations, with export values rising more than 7%Y/Y in dollar terms (10.4%Y/Y in yuan terms) as demand from its major trade partners – i.e. the US (12.5%Y/Y), Hong Kong (6.6%Y/Y) and ASEAN countries (14.0%Y/Y) – picked up. Given the weakness seen earlier in the year, this still left exports in the first seven months of the year down more than 4%YTD/Y. Reflecting ongoing weakness in domestic demand as well as lower commodity prices, imports remained very subdued in July, falling 1.4%Y/Y in USD terms, leaving them down more than 5½%YTD/Y and resulting in an increase in the trade surplus to $62.3bn. Imports from the US rose just 3.6%Y/Y, leaving them trending more than 50% below Trump’s Phase One targets.

German and French manufacturing steadily recovering:
Following yesterday’s much stronger-than-expected factory orders data, this morning’s German production and trade data maintained the broadly positive newsflow from the euro area’s largest member state, even though activity remained some way below pre-Covid levels. Most notably, total German industrial production rose 8.9%M/M in June. That meant that roughly half of the drop in production caused by the lockdown had been reversed, with IP still more than 12% below February’s level and down 11.5%Y/Y.

Within the detail, output of manufacturing and mining rose 11.1%M/M with production of capital goods up a vigorous 18.3%M/M. And most striking was production of autos as producers anticipated stronger domestic demand in the second half of the year, rising 54.7%M/M, albeit leaving it still down a little more than one fifth from February’s level. Among other components, energy production rose 5.5%M/M but was still down more than 9% from February. And construction rose just 1.4%M/M to be still more than 4.5% below the recent peak in March.

Like the orders data, surveys such as the manufacturing PMIs point to further production growth in July, as did today’s truck toll mileage figures, which often correlate closely with IP. These reported a rise of 1.9%M/M in large truck mileage on the autobahns last month, leaving it down just 2.0%Y/Y and 4.7% below the pre-Covid peak in July.

Meanwhile, the value of German exports also continued to recover in June, rising for a second successive month and by a post-reunification high of 14.9%M/M to reverse a little more than half of the peak-to-trough drop between February and April. As a result, they were still about 16% below the February peak and down 9.4%Y/Y. On the same basis, imports rose 10.6%M/M, the most in a decade, to be down 12.5%Y/Y and more than 13% from their peak at the start of the year.

Other data released this morning confirmed that French industrial production also continued to recover at the end of Q2. In particular, manufacturing output rose a further 14.4%M/M in June following growth of 22.2%M/M in May to be down 12.4% from February’s pre-Covid level. As in Germany, the autos sector led the way, where output rose 39.5%M/M following growth of more than 50%M/M the prior month, albeit still down 29.1% from February’s level. Production of machinery and equipment also rose vigorously for the second successive month (up 14.6%M/M following growth of almost 30%M/M in May). And as in Germany, surveys and other leading indicators point to further recovery in French manufacturing production in July.

Looking ahead to the US:
After Trump issued two executive orders giving his nation’s companies 45 days to cease dealing TikTok’s owner ByteDance and WeChat, all eyes today will remain on the US, where discussions on new fiscal stimulus remain deadlocked and the July payrolls report is due. While the ADP release earlier in the week revealed a much weaker than expected increase in private sector jobs last month (167k), this followed a significant upwards revision in June (by 2mn to 4.4mn). But while economic activity has levelled off over the past month, yesterday’s unemployment insurance claims data were better than feared. Today’s Bloomberg consensus is for an increase in non-farm payrolls of about 1.5mn in July (Daiwa America’s Mike Moran is going for 1.8mn). The unemployment rate is forecast to have declined ½ppt to around 10.5%, down from April’s peak of 14.7% but nevertheless still well above the pre-pandemic rate of 3.5%.

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